Big margin potential in 3x ETFs during the next recession

[badnewsbear]

Hi, this is my first post!

I made an account just to share this theory I have. So, TQQQ does well in an expansion cycle, while SQQQ does well in the contraction cycle. Looking back to 2010, SQQQ was over 300$ per share and that's about 1 year AFTER the end of the NASDAQ-100 contraction. I think the bull markets have until the fed raises the federal funds rate above GDP levels, and then the market will enter a contraction. Most of us know that the markets are over valued, with enormous speculation driving growth in companies with 100+ PE ratios. We've had the most IPOs since the tech bubble days. This can't last.

So, with that said, if SQQQ is below 10$ by then, it's possible for the ETF to reach 2000%+ margins during the peak of the next recession.

It's happened before, and it may happen again, but I'm confused because I've never heard anyone getting these levels of returns. Any thoughts?

 

[Took2Summit]

Quote from badnewsbear:

Hi, this is my first post!

I made an account just to share this theory I have. So, TQQQ does well in an expansion cycle, while SQQQ does well in the contraction cycle. Looking back to 2010, SQQQ was over 300$ per share and that's about 1 year AFTER the end of the NASDAQ-100 contraction. I think the bull markets have until the fed raises the federal funds rate above GDP levels, and then the market will enter a contraction. Most of us know that the markets are over valued, with enormous speculation driving growth in companies with 100+ PE ratios. We've had the most IPOs since the tech bubble days. This can't last.

So, with that said, if SQQQ is below 10$ by then, it's possible for the ETF to reach 2000%+ margins during the peak of the next recession.

It's happened before, and it may happen again, but I'm confused because I've never heard anyone getting these levels of returns. Any thoughts?

there's nothing confusing about it. it is that simple..if you think you can pick the exact top and the exact bottom of a market cycle you will be making 2000%+ on 3x leveraged etf's no problems. no one here will argue against that.

 

[Maverick74]

Quote from Took2Summit:

there's nothing confusing about it. it is that simple..if you think you can pick the exact top and the exact bottom of a market cycle you will be making 2000%+ on 3x leveraged etf's no problems. no one here will argue against that.

Actually it's not that simple. Those ETF's are path dependent and need to be modeled using a monte carlo simulation. There are a boatloads of white papers out there explaining the volatility drift and the performance of 3X etf's using various volatility levels. His returns could be no where near what is stated depending on the given path.

 

[Took2Summit]

Quote from Maverick74:

Actually it's not that simple. Those ETF's are path dependent and need to be modeled using a monte carlo simulation. There are a boatloads of white papers out there explaining the volatility drift and the performance of 3X etf's using various volatility levels. His returns could be no where near what is stated depending on the given path.

I don't think you understood the point of my post. I was not talking about the structure of leveraged etf's which is fairly obvious. Instead I was referring to the fact that if you can pick the perfect top and pick the perfect bottom, like the OP suggests, and on top of that use leveraged products in addition to margin, you can make infinite returns.

Essentially I was sarcastically saying "it's not that easy" but I guess I should have been more straight forward.

 

[Maverick74]

Quote from Took2Summit:

I don't think you understood the point of my post. I was not talking about the structure of leveraged etf's which is fairly obvious. Instead I was referring to the fact that if you can pick the perfect top and pick the perfect bottom, like the OP suggests, and on top of that use leveraged products in addition to margin, you can make infinite returns.

Essentially I was sarcastically saying "it's not that easy" but I guess I should have been more straight forward.

It seemed to me that the OP was a newbie who probably has no idea how these ETF's work and simply pulled up a chart and extrapolated a return based on that. It's a common mistake especially when you see these 3X ETFs trading in single digits. It's very easy to get blinded by the chart if one doesn't understand the math.

 

[bwolinsky]

Quote from Took2Summit:

I don't think you understood the point of my post. I was not talking about the structure of leveraged etf's which is fairly obvious. Instead I was referring to the fact that if you can pick the perfect top and pick the perfect bottom, like the OP suggests, and on top of that use leveraged products in addition to margin, you can make infinite returns.

Essentially I was sarcastically saying "it's not that easy" but I guess I should have been more straight forward.

Good luck finding a broker that'll lend you more than 112% of your account because there are none out there.

 

[bwolinsky]

Quote from badnewsbear:

Hi, this is my first post!

I made an account just to share this theory I have. So, TQQQ does well in an expansion cycle, while SQQQ does well in the contraction cycle. Looking back to 2010, SQQQ was over 300$ per share and that's about 1 year AFTER the end of the NASDAQ-100 contraction. I think the bull markets have until the fed raises the federal funds rate above GDP levels, and then the market will enter a contraction. Most of us know that the markets are over valued, with enormous speculation driving growth in companies with 100+ PE ratios. We've had the most IPOs since the tech bubble days. This can't last.

So, with that said, if SQQQ is below 10$ by then, it's possible for the ETF to reach 2000%+ margins during the peak of the next recession.

It's happened before, and it may happen again, but I'm confused because I've never heard anyone getting these levels of returns. Any thoughts?

Do me a favor my good, sir!

Get the daily NASDAQ100 Index returns.

Make a column of TQQQ and SQQQ.

Calculate the percentage change in each column and compute the new theoretical value of TQQQ and SQQQ.

Do this by raising the 1:1 ratio percentage return on the .NDX by 3.

If you do this, I guarantee you will find 90% drawdowns in the historical past.

There is no way for SQQQ to ever return 20 times it's value.

$10 on it is a numbnuts call because it always goes to zero, and so too will TQQQ.

Also, markets go up during interest rate tightening because contango is more pronounced, meaning the roll on carry for futures makes it so that futures further out have to go up because there's a higher yield on futures margins.

Among a number of other reasons why tightening won't mark the start of a bear market consider also that by the Fed earning higher yields on their treasury bonds the budget deficit will narrow, and this will be seen as a positive.

 

[badnewsbear]

Quote from bwolinsky:

Do me a favor my good, sir!

Get the daily NASDAQ100 Index returns.

Make a column of TQQQ and SQQQ.

Calculate the percentage change in each column and compute the new theoretical value of TQQQ and SQQQ.

Do this by raising the 1:1 ratio percentage return on the .NDX by 3.

If you do this, I guarantee you will find 90% drawdowns in the historical past.

There is no way for SQQQ to ever return 20 times it's value.

$10 on it is a numbnuts call because it always goes to zero, and so too will TQQQ.

Also, markets go up during interest rate tightening because contango is more pronounced, meaning the roll on carry for futures makes it so that futures further out have to go up because there's a higher yield on futures margins.

Among a number of other reasons why tightening won't mark the start of a bear market consider also that by the Fed earning higher yields on their treasury bonds the budget deficit will narrow, and this will be seen as a positive.

I can see that SQQQ and TQQQ go either up or down over the long term, and doesn't really spike up.

I'm also looking at TNA/TZA and FAS/FAZ, these ETFs seem to spike up or down with volatility. For example, TZA was at ~$25.52 on June 18, 2010 and spiked up to $157.08 by July 16, 2010. Same with FAZ. It was at ~$30 on Feb 18, 2011 and spiked up to ~$157 by Feb 25, 2011.

I understand that SQQQ/TQQQ doesn't have that huge up or down opportunity, but TNA/TZA and FAS/FAZ seem that they do. I'm being hypothetical here, so let's say this bull market lasts 3 years. Let's say FAZ goes to $5, and you buy it at $5 because you think the bull market is soon to be over. When the stock market bubble pops, FAZ can go to $300 or higher at the height of the panic. What do you think about this hypothesis?

 

[Maverick74]

Quote from badnewsbear:

I can see that SQQQ and TQQQ go either up or down over the long term, and doesn't really spike up.

I'm also looking at TNA/TZA and FAS/FAZ, these ETFs seem to spike up or down with volatility. For example, TZA was at ~$25.52 on June 18, 2010 and spiked up to $157.08 by July 16, 2010. Same with FAZ. It was at ~$30 on Feb 18, 2011 and spiked up to ~$157 by Feb 25, 2011.

I understand that SQQQ/TQQQ doesn't have that huge up or down opportunity, but TNA/TZA and FAS/FAZ seem that they do. I'm being hypothetical here, so let's say this bull market lasts 3 years. Let's say FAZ goes to $5, and you buy it at $5 because you think the bull market is soon to be over. When the stock market bubble pops, FAZ can go to $300 or higher at the height of the panic. What do you think about this hypothesis?

No, it won't. It's not how those ETF's work. They are path dependent!

 

[FreeMktFisherMN]

I haven't officially backtested it or anything but I would find it hard to believe that given how bubblicious all this ES is as the algos go along with the narrative of 'recovery', that pyramiding into say at least a 1x inverse SPY ETF wouldn't be in the money 'decently' relatively quick. Not saying this is a martingale, but the principles apply, with the condition that one START the process when something is already overbought. I would be cautious given the light volume and algo and QE conditions of hopium of shorting, but doing so in scaling into longs of say something like coffee or corn soon is a legit idea IMO. Always contingent on it being risk capital. Commodities have intrinsic value and supply demand. Scaling into longs in something already way beaten down is a real idea IMO.