In our blog post of 3-13-20 we stated that our market strategy was to place buy limit orders on triple long ETFs at very low prices, in order to establish a leveraged long position if the market became extremely oversold.
Specifically we said to place buy limit orders on the triple leveraged Nasdaq 100 ETF (TQQQ), in the $35 – $45 price range. TQQQ then fell to a low of $32.27 on March 23rd, so all these buy limit orders were filled, with an average cost in the $40 range.
Figure 1 A successful strategy — buying TQQQ when it was very oversold
Then the market turned up in late March and early April. In our 4-8-20 blog post “Update on our ETF strategy from March,” we stated that our exit strategy was to place sell limit orders on the TQQQ position at prices of $56, $59, and $63.
Yesterday, on 4-14-20, TQQQ reached $64, so all of these sell limit orders were executed.
The exact return on the strategy depends on how many shares were bought and sold at each price. By using three separate buy limit orders, we acquire some shares at $35, some at $40, and some at $45, then sell them at $56, $59, and $63. In general, we want to buy more shares at the lower prices. So the exact return depends on the number of shares in each lot, but the average cost was near $40 and the average selling price was near $60, for an overall return of roughly 50%.
The bottom line is that the strategy that we outlined in our 3-13-20 blog post produced a large 50% gain within a month. By placing a series of buy limit orders on TQQQ at staggered prices, we built a leveraged long position near the market lows, which led to significant gains when the market recovered.
In our view this situation had a good risk / reward ratio, because by mid-March many indicators showed that the market was becoming very oversold. The VIX had risen to 75, various breadth indicators were at extreme lows, etc., which suggested that a lot of bad news was priced in.
Of course, by exiting the trade yesterday, we may have sold too soon. If the market keeps rising, TQQQ could go much higher than $60. As seen on the chart above, it was over $100 in February.
However, we felt it would be prudent to lock in a 50% gain and reduce our use of leverage, given the risks and uncertainties that continue to be pervasive in the current market environment.
(Note: this comment posted 4/15/20)