QQQ's Dip on CPI Shows How ETFs Tip Off Investors

QQQ's Dip on CPI Shows How ETFs Tip Off Investors

Upturn in VIXY, USO can also be seen as canaries in the coal mine.

Reviewed by: etf.com Staff
Edited by: Ron Day

Tuesday’s CPI report showed prices rising more than expected, and subsequently was dubbed a “disappointment” that “surprised” markets.

That’s the standard assessments of daily market activity after a day like Tuesday, in which the Invesco QQQ Trust ETF (QQQ) fell more than 1.5%, even after rallying late in the session. QQQ is off to a fine start this year, up 4.6% even after that one-day pullback and near a recent all-time high.

But is it really that surprising that the market fell apart like that so suddenly? Not if investment advisors and self-directed investors take their ETF usage to the next level.

Specifically, since so many ETFs are designed to track indexes, those indexes collectively help tell the market’s ongoing story. So even if the news of economic data releases, earnings or other events might make people think, something is going to happen, ETFs that track certain market segments can clue us in to where risk is high, low, or in between. 

Even though risk is not always realized, it doesn’t mean there isn’t still risk. For instance, when stocks sell at outrageous multiples, they can still rise in price, defying traditional definitions of what is “fair value.” 

VIXY, Other ETFs Warn of Pending Market Risk 

As for recent market activity, there were a pair of tip-offs that preceded Tuesday’s CPI report and sell-off that investors could look at and at least recognize that the potential for a sudden decline was higher than normal.

The first case in point was trading activity in the ProShares VIX Short-Term Futures ETF (VIXY), one of a small number of ETFs that aims to profit from spikes in the value of Wall Street’s most noted fear gauge. VIXY has been in the doldrums, as expected when the market rallies as it has since last October.

During that time, VIXY’s price looked like a two-for-one stock split, except that was no split. It was a 50% drop in value in the past four months. That’s par for the course in a sharp stock market surge. From a technical analysis standpoint, VIXY appeared to hint at turning a corner in recent days, based on some popular indicators known as “oscillators.”

So that ETF’s 7.4% spike in price on Tuesday might at least be a wakeup call for investors looking for a signal that all is not well in the stock market. The VIX indicator itself was up nearly 14% on Tuesday but is still only at 16. That’s a far cry from where it could go if the markets get unruly. The VIX traded as high as 35 in the 2022 bear market. 

The other notable technical signal in ETF form was in those funds that track the price of oil. Not oil stocks, which tend to be treated like other stocks and often fall with the market, as many did on Tuesday.

Rather, ETFs like the United States Oil Fund LP (USO) rose Tuesday, but more importantly have been showing signs of bottoming since the start of the year. USO has not cleared technical “resistance” around $73, which is a fancy way of saying that its price is trending up and has the type of momentum that could help it buck a further stock market decline.

Oil Rising: Heard This Before... 

Oil rising at a time like this should ring a bell for investors. CPI is a measure of inflation, and energy costs are a major component of what takes up space in our budgets. That and ongoing geopolitical hot spots may be conspiring to produce a resurgence in oil prices. Recall that the rough spots for stocks and bonds in 2022 included twin peaks in oil prices in March and June. 

One day does not a bear market make. But Tuesday’s price activity reminds us that ETFs are more than just investments. They are vital tools to help decipher that market story that many struggle to hear.

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.