Skip to main content

Time for Inverse Sector ETFs?

With what at first looked like a spasm in the market now displaying all the markings of a full-blown correction, it could be time to consider inverse sector ETFs.

ProShares has a slate of ultra ETFs that tracks eleven Dow Jones US indexes: Basic Materials, Consumer Goods, Consumer Services, Financials, Health Care, Real Estate, Industrials, Semiconductors, Oil & Gas, Technologies and Utilities. The ultra ETFs are meant to deliver 200% of the performance of the underlying index.

These ETFs come in two flavors: long and short (the short funds are often referred to as inverse). The short ETFs go up when the underlying index goes down. The long funds go up in concert with the underlying index.

If you are in the bear camp and believe we have further to go on the down side, this could be a good time to identify those sectors that are expected to be most under pressure in the coming weeks or months. In reviewing the charts this week, there was a pretty consistent pattern: big drops starting Tuesday, moving averages violated, etc. Those that looked most interesting to me include Financials, Industrials, Basic Materials and Technology. A good candidate out of this sub-group might be Financials. With the turmoil in the mortgage lending industry, especially in the sub-prime market, and the unwinding of the Japanese yen carry trade there are some negative factors setting up that could keep the Financials from bouncing back. In addition, if the current downturn becomes more extended it could reduce investment banking and brokerage revenues which have been strong lately. The following chart shows the Select Sector: Financial SPDR ETF (XLF) compared to its 65-day moving average and to the ProShares UltraShort Financials ETF (SKF).

Click to view larger image

Note that the 65-day MA for XLF has been clearly violated since the start of trading on Tuesday, 2/27. Note also that since 2/27, the UltraShort ETF has climbed over 10%. Of the sectors mentioned above, this chart is one of the most extreme.

The situations that have developed with the Select Sector: Technology SPDR (XLK) and the ProShares UltraShort Technology ETF (REW) and the Select Sector: Industrials SPDR (XLI) and the UltraShort Industrials (SIJ) look very, very similar to that of XLF and SKF.

The Select Sector: Basic Materials SPDR (XLB), however, has not broken down as badly as those mentoned above. Nevertheless, a bear could point to a number of troubling signs. Manufacturing in the U.S. has been struggling over the last few months and, as with technology companies, earnings forecasts are less than stellar. This would tend to impact Basic Materials as their customer base is saying they are not expecting business to be robust. In the case of Basic Materials, the chart is not so extreme as the one shown above for XLF. The 65-day MA has not yet been crossed but if it is, there would be time to catch the move early and potentially rack up a quick double-digit gain. Now might be the time to pay close attention to the ProShares UltraShort Basic Materials ETF (SMN).

If the Basic Materials trade looks good to you, you should also check out the situation developing with the iShares Dow Jones US Real Estate ETF (IYR) and the ProShares UltraShort Real Estate ETF (SRS). IYR had been trending strongly upward for several years until early in February when it finally began to weaken. This week's market drop just pushed it below its 65-day moving average and, with investors beginning to believe that real estate may not yet have seen the bottom, IYR could have further to go on the downside. As the following chart shows, this could be a good time to buy SRS.



Click to view larger image

For more information on the ProShares Funds click on the following links:
UltraShort Sector Funds and Ultra Sector Funds. These ETFs have only been available for about a month but they seem to have arrived just in time.

Comments

Speedmaster said…
Good post. I'd be lying if I said I understood it all. ;-)

On the manufacturing note, I think trying to use protectionist tariffs, hand-outs, etc. to subsidize domestic manufacturing is a bad plan. I would rather have one of my children be a doctor or lawyer than work in a factory. Even though medicine and law are both the dreaded "service sector" sector jobs. ;-)

The fascination some have with maintaining domestic manufacturing at any cost is a holdover of mercantilist ideology imho.
Not the point of my post but, as a proponent of free trade, I agree protectionism is not in the best interest of the consumer or the country.

Popular posts from this blog

Time to be conservative with your 401K

Most of the posts I and other financial bloggers write are typically focused on individual stocks or ETFs and managing active portfolios. For those folks who are more conservative investors, those whose main investment vehicle is a 401K, for example, the techniques for portfolio management might be a little different. The news of stock markets falling and pundits predicting recession is disconcerting to professional investors as well as to those of us who are watching our balances in an IRA or 401K sag. What approach should the average 401K investor take? Let's assume that the investor is contributing on a regular basis to one of these retirement accounts. There are two questions that the investor needs to ask: 1. Should I stop putting the regular contribution into stocks? My feeling is that investors making regular contributions are being handed a present by the markets. Every week the market goes down, these investors are lowering their average cost. When markets reco...

The Trouble with Trend Reversal Indicators

Many of us use various trend reversal indicators to time our trades. Our desire is to determine when prices have changed direction so that we can ride the new trend. Why doesn't it always work out? The first reason, of course, is that unforeseen events often drive prices in unexpected directions. That is something we can't change and it often makes all of us technical traders crazy. On the other hand, sometimes an unforeseen event is a prelude to a new trend. A stock spikes up on a what seems to be a one-time piece of good fortune and soon falls back. Does it start making its way back up or does it resume a previous down trend? The conflict within trend reversal indicators is that, though they can definitely tell when prices change direction, they suffer from two problems. One, they often can't determine how significant that move in prices actually will be. Two, they are often lagging indicators. As such, they can be late in providing a signal, sometimes leading the investo...

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what...