ETF Chart of the Day: Shorting Large-Cap U.S. Stocks

October 28th at 10:41am by Paul Weisbruch, Street One Financial

The rally in U.S. stocks this month has pushed the S&P 500 and Dow Jones Industrial Average above their 200-day simple moving averages in a victory for the bulls.

Our market technician David Chojnacki points out the indices are poised to test the April and July highs, but with a 19.5% move in the S&P 500 from its intra-day low on Oct. 4, expect some pullback after the strength in the last five days.

The S&P 500 hardly paused as it moved through resistance yesterday between 1263 and 1275, indicating the strength in Thursday’s session after the European debt deal. Expect to find support at the 1236 to 1242 level in any pullback. There is a congestion area between 1263 and 1300, so we may have to work through here before moving up to test the April highs.

The VIX dropped 14.7% and closed at 25.4, remaining below 30 for two sessions now. A drop in volatility is key to building further upside strength.

However, as we have seen in recent months, it is possible we will see some profit taking into this rally or potentially new shorts entering the picture.

For those who believe that the rally is “overdone” and due for some sort of a pullback, there are a number of directional trading vehicles that can offer “short” exposure to the large cap equity space.

Direxion Large Cap Bear 3x Shares (NYSEArca: BGZ) is one such example, offering 3 times daily leveraged short exposure to the Russell 1000 index.

Direxion Daily Total Market Bear 1X Shares (NYSEArca: TOTS) is more comprehensive, giving unleveraged short exposure to the MSCI U.S. Broad Market Index.

Other “short” ETFs in the space includeProShares Short S&P 500 (NYSEArca: SH), ProShares UltraShort S&P 500 (NYSEArca: SDS), ProShares UIltraPro Short S&P 500 (NYSEArca: SPXU) and Rydex Inverse 2x S&P 500 ETF (NYSEArca: RSW).

It is important for the portfolio manager to understand the effects of daily leveraging and the effects of compounding on returns, and adeptly rebalance positions in such ETFs for hedges and/or directional trades as opposed to using these vehicles in a “buy and hold” strategy.

Direxion Large Cap Bear 3x Shares

For more information on Street One ETF research and ETF trade execution/liquidity services, contact pweisbruch@streetonefinancial.com.