Published November 14, 2012
More than a week removed from the presidential election and it is clear that even has become a favorite excuse of traders looking to explain the market's recent bearish ways. Indeed, the election results are a valid excuse, and so are fears regarding the fiscal cliff and Europe's sovereign debt crisis.
Another concern for investors is that November is not living up to its billing as a historically strong month in which to be long stocks. After Wednesday, there are just 10.5 trading days left and the month and it would take a rally of furious proportions to erase November losses of three percent for the SPDR S&P 500 (SPY) and 3.5 percent for the PowerShares QQQ (QQQ).
Investors that are expecting more November rain for stocks should consider the following inverse and leveraged ETFs.
Direxion Daily Small Cap Bear 3X Shares (TZA) The end of the year often brings selling in small-caps for tax reasons before fund managers, assuming they are bullish, load up on small stocks in January. It is too early to start projecting if the January Effect, the scenario in which small-caps lead a rally to start to the new year, but it is clear that the current risk-off tenor to the market is damaging to stocks with diminutive market values.
The iShares Russell 2000 Index Fund (IWM) has tumbled 5.4 percent in the past month and looks technically vulnerable. On the other hand, the Direxion Daily Small Cap Bear 3X Shares is close to breaking through its 200-day moving average. If that happens, TZA could run to $20.
ProShares Short MSCI EAFE (EFZ) Holders of the ProShares Short MSCI EAFE need to track the iShares MSCI EAFE Index Fund (EFA), the ETF for which EFZ is the inverse equivalent. Currently, EFA is teetering on critical support. Should the ETF fall below $52, the 200-day moving average will likely be violated as well. From there, the next stop could be psychological support at $50.
Conservative investors looking for a hedge to a long position in EFA can feel comfortable in knowing that EFZ is not a leveraged product. For example, if EFA drops one percent, EFZ should rise by a comparable amount.
ProShares UltraShort Oil & Gas (DUG) The ProShares UltraShort Oil & Gas, a double leveraged inverse fund, "seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Oil & Gas Index," according to the issuer. That is the index tracked by the iShares Dow Jones U.S. Energy Sector Index Fund (IYE).
IYE's chart is a mess and the fund is down five percent in the past month. Adding to the short-term bull case for DUG is the fact that it is unfair to solely pick on IYE among energy ETFs. The Vanguard Energy ETF (VDE) is off 5.3 percent in the past month while the Energy Select Sector SPDR (XLE) is off 4.8 percent over the same time.
Said another way, not much has worked recently with oil equities and with crude prices faltering due to fears of the fiscal cliff, DUG might just be the best near-term bet among oil ETFs.
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