Low Buying Levels In SSO Suggest Bear Market May Not Be Over (NYSEARCA:SSO)

We believe in the theory of contrary opinion, and the Sentiment King focuses on studying and measuring investor sentiment and activity. This article is part of a continuing series of articles (here) on how to use investor activity in exchange-traded funds (“ETFs”) to help determine the direction of the stock market. Since ProShares has over 130 ETFs with more than $50 billion in assets – many with 2X and 3X leverage – it is the perfect fund family to use for this purpose.

SSO – ProShares Ultra S&P500

ProShares Ultra S&P500 (NYSEARCA:SSO) is one of a number of 2x ProShares ETFs (the Ultra Series) that goes double-long a major market index, in this case, the S&P 500. It has 56.7 million shares outstanding and total assets of $2.242 billion. By assets, it’s ranked 6th of 136 funds in the ProShares family.

ProShares writes the following about SSO:

ProShares Ultra S&P500 seeks a return that is 2x the return of its index (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return and ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily. Investors should consult the prospectus for further details on the calculation of the returns and the risks associated with investing in this product.

SSO Graph

This graph shows the entire price history of SSO since inception on June 19th, 2006. It started with an adjusted price of $8.75, and it’s currently at $39.52. This is a gain of 351% and is due to the 2x leverage, low interest rates and the long-term bull market that began during the financial crisis of 2008.

At the beginning of the year, the fund was at $73.98. During the bear market, it has fallen 47% to $39.52. It should be noted that the current price is almost back to the highs made right before the start of the pandemic in February 2020.

Purchasing Levels of SSO

How do you measure investor buying in ETFs? Looking at sales like one does any stock is insufficient, since it doesn’t specify how much is from investor buying. With stocks, sales do represent the amount of buying, since buying and selling amounts are always equal. But with ETFs, they aren’t. If there are more buyers than sellers of an ETF, the fund creates more shares for the excess buyers. If there are more sellers than buyers, they retire the excess shares.

So, sales numbers alone don’t tell you how much money is going into or out of an ETF; you must combine sales with changes in the number of shares outstanding to determine that. Once this is done, multiplying the number of shares being purchased by the fund’s NAV yields how much money is going into the fund on a daily basis.

Measuring the dollar amount going into a fund is not the best measure, however. What’s better is the amount of money going into the fund divided by the total assets in the fund. Producing a ratio allows for historical comparisons; absolute values don’t. The current purchasing ratio for SSO is 13.1%.

As the graph shows, the current purchasing ratio is measurably less than all major intermediate and bear market lows since 2015. It’s just slightly below the 15% registered earlier in May. This seems to reinforce the idea that the final shoe hasn’t dropped yet to this bear market and further price declines are needed to finally bring in more buyers to SSO.

The relatively low purchasing level is similar to the low level in the ProShares QLD. If one believes in this historical SSO data, the obvious conclusion would be that the bear market is not over and probably won’t be until investors increase their buying of SSO. This is confusing since it’s counter to what other ProShares funds seem to indicate, as well as key sentiment indicators.

The History of Outstanding Shares in SSO

The graph below plots SPY against the number of shares outstanding in SSO. When more investors enter a fund than leave it, the number of shares outstanding increases. When more investors sell the fund than buy it, the number decreases. The current number is 56,750,000 shares.

While it is usually helpful to graph changes in the number of shares outstanding of ProShares ETFs – as you can see (here) and (here) in two previous ProShares articles – it seems to have little value here. As the chart shows, the SO has been very slowly contracting for five years, with no large surge, and there are unexplainable spikes or noise in the data, which makes it suspect. Because of this, we can’t use SO data in SSO to confirm or contradict the conclusion of the previous purchasing level graph. But we are including it here for completeness.

The Ratio of Bull and Bear Assets in ProShares ETFs

The ProShares bull to bear asset ratio is another way we measure investor sentiment or expectations. It’s a contrary opinion indicator. It takes the dollar value in all the ProShares bull funds and divides it by the dollar value of all the bear funds. At the market top in December, there was over 10 times more money in bullish ProShares ETFs than bear market ETFs. It is now down to a little over two.

For example, the graph clearly shows the surge of money into ProShares bull funds from September to December of last year, right before the start of the bear market. The ratio went from 6.5 to 10.5. Extremely bad timing. The current ratio is two to one, which is much closer to the bear market lows of 2020.

What’s important now is that the asset ratio went to new lows as the S&P just slightly broke below the price lows of May. Notice the two broken green lines in the graph. It’s flat for stocks and slanted lower for the ratio. This means that even more ProShares investors believe the market’s headed lower than at the May low. This again is what you want to see if you’re a contrarian. It suggests stock prices should move higher over the intermediate term. This idea is just not yet confirmed by metrics on investor activity in SSO. It is confirmed, however, by the Master Sentiment Index, which is registering the most extreme bearish reading in 17 years. If you are a contrarian, this is positive.

The Master Sentiment Indicator at its Most Extreme Reading

The 16-year chart below plots the Master Sentiment Index, which is a composite index made from seven established sentiment indicators, against the S&P 500 SPDR ETF (SPY). The seven indicators include the total puts to calls ratio, the equity puts to calls ratio, the American Association of Individual Investors survey, the NAAIM survey, Hilbert sentiment statistics, investor activity in the ProShares S&P short fund (SH) and the CME commitment of trader data. All the information below is as of October 14th. The MSI is designed to signal long-term market trends; it is not a short-term indicator.

It is easy to see the correlation between major market lows and extreme bearish readings on this index. The current reading of 6.4% is the same as last week and is the lowest number over the last 17 years. If you are a contrarian, such a this is highly bullish for the stock market.

An Important Caveat

While I’m not so worried about the American economy dragging the stock market much lower, I am worried about a global financial crisis doing it, triggered by the actions of narrow-minded central bankers focused on just their own economy. While central banks are looking after their own economies, no agency is looking after the well-being of the entire global financial system. This is a serious issue, which I explain in the second half of the article (here) I wrote on the Puts and Calls ratio.