As we head into the earnings season, U.S. companies may reveal a significant fall off in profits over the first quarter, extending a so-called earnings recession. Exchange traded fund traders, though, can hedge against the potential volatility with inverse or bearish products.
S&P 500 Index company profits are projected to fall 9.8% in the first quarter year-over-year, the sharpest decline since the third quarter of 2009 and a fourth consecutive quarterly contraction, according to Bloomberg.
While slightly less pessimistic, FactSet projects first quarter earnings to decline 8.5%, which is significantly lower compared to its previous estimated earnings growth rate of 0.8% for Q1 2016 at the start of the year.
Alex Bellefleur, head of global macro strategy and research at Pavilion Global Markets, argues that the earnings results will be insufficient to justify current valuations, which suggests that the equities market could have a hard time ahead.
Consequently, investors seeking to hedge against a potential pullback in an expected weak earnings season may turn to inverse or short ETFs.
[related_stories]For those who were wary of a potential pullback in the S&P 500 index, there are a number of bearish or inverse ETF options with varying levels of leveraged exposure to capitalize off a weakening S&P 500. The ProShares Short S&P500 (NYSEArca: SH) takes a simple inverse or -100% daily performance of the S&P 500 index. 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.
Breaking down the market, FactSet believes seven sectors are projected to report a year-over-year decline in earnings, led by energy with a 101.8% plunge in year-over-year earnings. The energy sector is also expected to reveal its first quarter loss in at least a decade.
Investors who have been enjoying the rally in oil and energy in recent weeks may also turn to inverse ETF options to hedge further risks.
For those seeking a hedge against further weakness in the energy sector, the ProShares Short Oil & Gas (NYSEArca: DDG) tries to reflect the inverse, or -100%, daily performance of the Dow Jones U.S. Oil & Gas Index. The UltraShort Oil & Gas ProShares (NYSEArca: DUG) takes two times the inverse, or -200%, daily performance of the Dow Jones U.S. Oil & Gas Index. The Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY) reflects three times the inverse, or -300%, daily performance of the energy select sector index. Moreover, the recently launched Direxion Daily S&P Oil & Gas Exploration & Production Bear Shares (NYSEArca: DRIP) takes the -3x, or -300%, daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index.