The Reality of Trading TQQQ and Key Strategies

Key Concepts

• TQQQ (ProShares UltraPro QQQ): A leveraged ETF aiming for 3x the daily return of the Nasdaq-100 index.
• QQQ (Invesco QQQ Trust): An ETF tracking the Nasdaq-100 index, comprising 100 of the largest non-financial companies listed on the Nasdaq.
• Leveraged ETFs: ETFs that use financial derivatives and debt to amplify the returns of an underlying index. They also amplify losses.
• Technical Indicators: Tools used to analyze price and volume data to predict future price movements (e.g., MACD, RSI, CCI, EMAs, VWAP, Keltner Channels).
• Market Timing: The strategy of attempting to predict future market movements to buy or sell assets at opportune times.
• Buy and Hold: A long-term investment strategy where assets are purchased and held for an extended period, regardless of market fluctuations.
• Drawdowns: The peak-to-trough decline during a specific period for an investment.
• Expense Ratio: The annual fee charged by an ETF to cover its operating expenses.
• Assets Under Management (AUM): The total market value of the assets managed by an investment fund.
• Trading Volume: The number of shares of a security traded during a specific period.
• Reconstitution: The process by which an index is updated, with some components removed and new ones added.
• Sector Rotation: A strategy that involves shifting investments between different industry sectors based on their expected performance.
• Seasonal Strategy: An investment approach that capitalizes on predictable seasonal patterns in market performance.
• Moving Averages: Technical indicators that smooth out price data to create a single flowing line, representing the average price over a given period.
• Stop-Loss Order: An order placed with a broker to buy or sell a security when it reaches a certain price, intended to limit an investor's loss.
• Stop-Limit Order: An order that combines the features of a stop-loss order and a limit order.

Les Mason's Insights on TQQQ and Leveraged ETF Strategies

This summary details the insights shared by Les Mason, a seasoned trader and author with over 50 years of market experience, regarding leveraged ETFs, particularly the TQQQ, and various trading strategies. Mason emphasizes caution, thorough research, and the importance of a well-defined trading plan when engaging with these instruments.

1. Introduction to Les Mason and His Background

Les Mason, an author, researcher, and trader with over five decades of market experience, shares his journey and expertise. He holds a BBA in Finance and Investments and an MBA in Operations Research. His latest book, "The QQQ and TQQQ Profit Machine," focuses on leveraged ETF strategies. Mason's interest in markets began at age 13 with a gift of Pan-American Airways stock, leading him to extensive self-study through books and observation of market broadcasts like "Wall Street Week." His early trading experiences, including a significant loss on "Chuck Full of Nuts" stock, instilled in him the importance of risk management and protecting against collapse. He also detailed his early exposure to the mechanics of Wall Street, including ticker tapes and the pink sheets. Mason's career spanned banking, including roles in cash management consulting at Irving Trust and Bank of America, before transitioning to financial advising and eventually day trading TQQQ and NASDAQ E-mini futures.

2. The TQQQ: Performance, Risks, and Characteristics

• Performance: Since its inception on February 10, 2010, TQQQ has achieved a remarkable 23,912% return. This significantly outperforms the QQQ (1445%) and the S&P 500 (705%) over the same period.
• Leverage Mechanism: TQQQ aims to deliver 3x the daily return of the Nasdaq-100 index. This 3x leverage is guaranteed only for a single day. At the end of each day, the ETF is rebalanced, which can lead to compounding losses in flat or down markets.
• Drawdowns: TQQQ is known for its substantial drawdowns. During the market drop between February 18 and April 7 of a recent year, TQQQ fell by 61%. In the crash of 2000, a hypothetical investment would have lost 99%, and in 2022, it experienced an 81% drawdown. Mason stresses the need for "seat belts and helmets" or robust exit strategies when trading TQQQ.
• Expense Ratio: TQQQ has an expense ratio of 0.84%, which is four times that of the QQQ.
• Assets Under Management (AUM) and Trading Volume: TQQQ has approximately $26 billion in AUM, less than a tenth of QQQ's AUM. However, it ranks sixth in trading volume, with an average of 60.53 million shares traded daily.
• Comparison to Individual Stocks: Mason presented a chart showing that while individual "Magnificent Seven" stocks like Nvidia (up 1374%) and Meta (up 476%) had exceptional performance from October 2022 to a recent date, TQQQ (up 412%) still offered competitive returns, and other Mag 7 stocks underperformed TQQQ. He also contrasted TQQQ's performance with Berkshire Hathaway, noting that QQQ has outperformed Berkshire Hathaway since 1999, despite Berkshire's long-term historical growth.

3. The QQQ: The Underlying Index

• Composition: QQQ tracks the Nasdaq-100 index, which includes 100 of the largest non-financial companies by market capitalization listed on the Nasdaq. It excludes financial stocks.
• Growth Focus: The index is heavily tech-oriented (approximately 50%) but also includes companies from healthcare, consumer cyclicals, and other sectors. It is a growth-based index.
• Reconstitution: The QQQ is reconstituted annually, ensuring its components remain current with leading growth companies.
• Performance: Since 1999, QQQ has returned 1550%, more than double the S&P 500's 742% return.
• AUM and Trading Volume: QQQ has $366 billion in AUM, making it the fifth-largest ETF. It has a daily trading volume of 40 million shares, ranking it 11th.
• Characteristics: QQQ is described as highly liquid, transparent, and having tight bid-ask spreads (a penny). Its expense ratio is 0.20%.

4. SQQQ: The Inverse Leveraged ETF

• Purpose: SQQQ is the triple leveraged inverse ETF of the Nasdaq-100. It is designed to profit from a declining market.
• Volatility and Risk: SQQQ is only viable during bear markets. Bear markets are rare, fast, and furious, and rebounds can be rapid. Holding SQQQ during a V-shaped recovery can lead to significant losses (e.g., 25% in one day).
• Reverse Stock Splits: SQQQ has undergone multiple reverse stock splits due to its price declining significantly, indicating its tendency to lose value in bull markets. Mason suggests it is for the "nimblest and smartest" traders with substantial reserves.
• Market Bias: Mason notes that approximately 75% of market years are up years, making it generally unfavorable to bet against the tide with SQQQ.

5. Strategies for Trading Leveraged ETFs

Mason advocates for a disciplined approach to trading leveraged ETFs, emphasizing the need for strong rules and technical analysis.

• Doing Your Homework: Before trading any leveraged ETF, investors must read the prospectus, summary prospectus, and fact sheet to understand the risks.
• Chart Analysis: Analyzing full-life charts of the ETF with moving averages and other indicators is crucial.
• Starting Small: Begin with a small amount of capital (e.g., $1,000) and paper trade or trade with actual money to gauge psychological reactions.
• Cutting Losses Short: This is identified as the most critical trading guideline. Mark Minervini and other "Market Wizards" emphasize this principle. Mason warns against holding onto losing positions, as they can escalate from small losses to significant ones.
• Risk-Reward Ratio: Top traders aim for a minimum 2:1 risk-reward ratio, with many using 3:1, 4:1, or 5:1 to increase their odds.
• Technical Indicators: Mason uses MACD, RSI, and CCI, along with chart indicators like the 8 EMA, 20 EMA, 50 EMA, Keltner Channels, and Volume Weighted Average Price (VWAP). He primarily uses a one-minute chart, considering five minutes as long-term.
• Moving Average Strategies:
  • Mason's book explores strategies using moving averages, particularly with QQQ and TQQQ. He found that a 225-day moving average approach worked better with QQQ due to its volatility compared to the S&P 500 or Dow.
  • He tested various moving average filters (e.g., 20-day) on TQQQ strategies, finding that adding them often decreased performance, suggesting that the rapid snapbacks in leveraged ETFs can be missed by overly restrictive filters.
  • He emphasizes executing trades on the day of a crossover rather than waiting until the end of the month for better results.
• Relative Strength Approach: This involves creating a portfolio of ETFs (e.g., QQQ and a short-term treasury ETF like TLT) and switching between them based on their performance over a specific period (e.g., monthly, quarterly). Mason found monthly rebalancing to be most effective.
• Seasonal Strategies:
  • Drawing from Jeff Hirs' "Stock Trader's Almanac," Mason discusses the "best six-month strategy" (November 1st to April 30th) for the Dow Jones Industrials and a similar eight-month strategy for the Nasdaq. These strategies involve being invested during historically strong periods and holding cash during weaker periods, thereby reducing risk.
  • He notes that adding MACD to these seasonal strategies can improve performance. The best six-month strategy with MACD from 1950-2023 yielded $3.9 million from a $10,000 investment, while the other six months lost $5,367.
  • Mason also highlights that individual ETFs have their own seasonality, which can be analyzed using tools like stockcharts.com. September is generally the weakest month, while October is known as a rebound month.
• Day Trading vs. Buy and Hold: Mason primarily day trades TQQQ and NASDAQ E-mini futures to avoid overnight risk. He acknowledges that buy-and-hold can be a valid strategy for index funds over very long timeframes (20-30 years), especially for younger investors or for children's future.
• Market Timing vs. Time in the Market: Mason strongly advocates for market timing, especially for traders who don't have a 30-year horizon. He argues that without a strategy to exit during bear markets, buy-and-hold investors can suffer significant losses.
• Technical Indicators as Primary Tools: Mason believes technical indicators are essential for making trading decisions, rather than relying on guesswork or external advice. He uses the 20-day moving average as a primary indicator for market entry and exit, though he personally uses the 8 EMA as his "T-line" for intraday trading.
• Stop-Limit Orders: He recommends using stop-limit orders instead of stop orders to protect against gaps in price movement.

6. Key Trading Guidelines and Takeaways

Mason distills his extensive experience into several key trading guidelines:

1. Cut Your Losses Short: This is paramount. Never let a small loss turn into a large one.
2. Don't Dollar Cost Average into Declining Stocks: This strategy is risky for individual stocks that can go to zero. It's more appropriate for index funds or ETFs when they are trending upwards.
3. Market Time: For those not investing for 30+ years in index funds, market timing is essential to avoid significant losses during bear markets.
4. Use Technical Indicators: Develop a plan and use indicators to make informed decisions, rather than relying on opinions or forecasts.
5. Be a Specialist: Focus on trading one instrument or a small set of instruments to gain expertise.
6. Put Stop-Limit Orders in Immediately: Protect your downside from the moment you enter a trade.
7. Avoid Advice from TV: Opinions from media personalities are often unreliable. Develop your own trading plan.
8. Backtest and Start Small: Test your strategies and gradually increase capital as you gain experience and confidence.
9. Read Books on Trading: Learn from the masters and understand trading psychology.
10. Day Trading is Difficult: It has a high failure rate; consider longer-term strategies if you are not suited for it.
11. Consider ETFs for Diversification and Growth: ETFs offer a cost-effective way to gain exposure to various markets.
12. TQQQ for Long-Term Buy and Hold (with caveats): Mason recommends buying and holding TQQQ with a small percentage of capital (1-5%), ideally after a 25% drawdown, for 10-30 years, acknowledging its significant historical performance despite drawdowns.
13. Focus on the Nasdaq-100: The Nasdaq-100 is a growth-oriented index driven by innovation, particularly in areas like artificial intelligence.

7. Market Dynamics and Evolution

Mason observes that while the psychological factors and technical principles of trading remain constant, the pace of information dissemination and market reactions has accelerated significantly due to the internet and real-time data. He notes the proliferation of ETFs, with more ETFs now existing than individual stocks, and the rise of complex leveraged single-stock ETFs. He also critiques active ETFs, citing data that shows most active managers fail to beat their benchmarks over the long term.

8. Conclusion and Final Message

Les Mason's core message is one of caution, education, and self-reliance. He urges investors to be careful, understand what they are investing in, and develop their own trading plans based on technical analysis and disciplined risk management. He emphasizes that while markets have bull and bear phases, simple technical indicators can help navigate these cycles and protect capital. He encourages individuals to consider ETFs for their cost-effectiveness and diversification, particularly those focused on growth sectors like the Nasdaq-100.