After touching the top end of its long-term trading channel, the S&P 500 could be in for a correction. Traders who are pessimistic about benchmark index’s prospects can hedge against any short-term weakness with an inverse exchange traded fund.
There are a number of bearish or inverse S&P 500 ETFs with varying levels of leveraged exposure to capitalize off a weakening S&P 500. For instance, the ProShares Short S&P500 (NYSEArca: SH) takes a simple inverse or -100% daily performance of the S&P 500 index. [Do You Know How Your Leveraged ETFs Work?]
Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes the -3x or -300% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes the -300% daily performance of the S&P 500. [A Short ETF Idea for Developed Markets]
Technical analyst Carter Worth of Sterne Agee points out that the SPDR S&P 500 ETF (NYSEArca: SPY) has developed a “well-defined channel,” which indicates that there could be some short-term weakness in the S&P 500 after the index touched its upper trendline, reports Alex Rosenberg for CNBC.
A channel is the area between two parallel trendlines, or a measure of a trading range, with the upper trendline connecting price peaks and the lower line connecting lows.
“I do not draw the lines. … The lines draw themselves. It bounces perfectly, perfectly, perfectly, and guess where we’re fading just now? Right off the top” of the channel,” Worth said. “At a minimum, I think we go to the bottom of the channel, which implies about a 5 percent drop. Short the SPY.”
SPY traded at a high of 208.47 on December 5 and is currently trading close to 200.
Additionally, other market observers are bearish on the S&P 500 due to its lofty valuations.
“The S&P is trading about 17.7 times earnings, that’s about a turn and a half richer than it has historically, about 16.2 times,” options trader Mike Khouw said in the article.
SPDR S&P 500 ETF
For more information on the S&P 500 index, visit our S&P 500 category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of SPY.