Inverse ETFs Continue to Climb as Netflix Sours Nasdaq | ETF Trends

After attempting to briefly stage a bounce, stocks and index ETFs are struggling once again on Friday, sending the Nasdaq Composite headed into its worst week since 2020, amid precipitous signs for Netflix.

The Nasdaq Composite fell over 1.26% on Friday, and is off by more than 5.9% since Monday, on target for its worst week since October 2020. The Dow Jones Industrial Average and S&P 500 are both in the red as well, down 0.4% and 0.75% respectively, and also on track for a third straight week of losses.

Major stock ETFs are red on Friday as well, with the SPDR Dow Jones Industrial Average ETF (DIA), the SPDR S&P 500 ETF Trust (SPY), and the Invesco QQQ Trust (QQQ) all down as of 12:30 PM EST.

With earnings week continuing, streaming giant Netflix was the first key technology stock to report, and it posted a disappointing quarterly report, further rattling the already-fragile Nasdaq. Shares of Netflix tumbled over 22% on Friday after the company’s fourth-quarter earnings report revealed flagging subscriber growth. The news reverberated into competing stocks as well, as Disney fell 5% on Friday.

“It is these infamous stay-at-home plays … that had been bid up to valuations that get to the point where they’re priced for perfection,” Mark Luschini, chief investment strategist at Janney Montgomery Scott, told Yahoo Finance Live on Thursday. “Anything that is released about the companies’ investment results or prospects that doesn’t meet or exceed very elevated expectations leads to gigantic disappointment in the form of a share price decline.”

“This is indicative of companies that, again, have valuations that have been bid up by investors who, on disappointment, decide to sell first and ask questions later, and therefore leave huge carnage in their wake as valuations compress to better reflect prospects under a more normal economic climate,” Luschini added.

Significant losses in growth stocks have driven the Nasdaq Composite deeper into correction territory, catalyzed by climbing interest rate pressure, which makes tech’s high valuations appear less attractive. At Thursday’s close, the Nasdaq was 11.85% lower from its closing record in November.

“Given the emotional decline in the stock market of the last few days, fundamentals have been suspended as market action is entirely tied to technical support levels,” said Jim Paulsen, chief investment strategist at Leuthold Group.

“Until a level is reached in this collapse… fundamentals like bond yields, economic reports and even earnings releases will not likely have much impact. Fear now must be extinguished by some stock market stability before traders and investors again start to consider fundamental drivers,” added Paulsen.

The U.S. 10-year Treasury hit reached as much as 1.9% on Wednesday before paring bond losses somewhat on Thursday and Friday, as bonds prices run inversely with rates. Investors concentrated on the central bank’s forecast for increasing interest rates and tightening monetary policy. Investors will likely be very focused on the Federal Reserve’s two-day policy meeting, scheduled for next week.

“While a handful of rate hikes over the next year or two would represent a shift in Fed policy, we wouldn’t consider policy restrictive and we don’t expect the initial rate increase to derail the economic recovery,” said Scott Wren, senior global market strategist at Wells Fargo Investment Institute. However, Wren also added that rate hikes will inject volatility into the market.

As mentioned earlier this week, inverse ETFs have been the recipients of massive gains, as they climb when stocks suffer.

The ProShares Short S&P 500 (SH) gained 0.62% on Friday, while the other major indexes have fallen. Another highly leveraged ETF, the Direxion Daily S&P 500 Bear 3X Shares (SPXS), rallied over 2.25% on Friday, catalyzed by its triple leverage.

SPXS offers 3x daily short leverage to the broad-based S&P 500 Index, making it a powerful tool for investors with a bearish short-term outlook for U.S. large-cap stocks. Investors should note that the leverage on SPXS resets on a daily basis, which results in a compounding of returns when held for multiple periods. BGZ can be a powerful tool for sophisticated investors, but should be avoided by those with a low risk tolerance or a buy-and-hold strategy.

The ProShares UltraPro Short QQQ (SQQQ), which is specifically targeted to plays in the recently thrashed Nasdaq, is up over 3.35% on Friday as well.

This ETF offers 3x daily short leverage to the NASDAQ-100 Index, making it a powerful tool for investors with a bearish short-term outlook for nonfinancial equities. Investors should note that SQQQ’s leverage resets on a daily basis, which results in compounding of returns when held for multiple periods. SQQQ can be a powerful tool for sophisticated investors, but should also be avoided by those with a low risk tolerance or a buy-and-hold strategy.

“The market has been flashing faulty signals for the past few weeks and it seems as if the broader indices are finally breaking down,” said Scott Redler of T3 Live. The S&P 500 closed below 4,500 on Thursday for the first time since October 18, which Redler said is important from a technical standpoint and “opens the door for a targeted move to at least 4,320, which would take the S&P down 10%.”

In addition to inverse ETFs, investors looking for other options besides the stock market have favored energy. Crude oil has been surging higher recently, cresting $87, and favoring ETF investors in funds like the United States Oil Fund (USO), the United States 12 Month Oil Fund (USL), and the iPath Pure Beta Crude Oil ETN (OIL).

“I think there is a rotation going on towards those areas of the market that have been neglected for a long time — not just months, but years. Areas like financials and energy. Even health care, which is an area that had done a bit better during the pandemic, but really isn’t seeing any kind of multiples like it did in the past,” Jeffrey Kleintop, Charles Schwab chief global investment strategist, told Yahoo Finance Live on Thursday.

“I think those areas of the market have more durability here as we look at an environment where earnings growth is slowing so valuations matter more,” Kleintop added. “And many of these companies can look to generate earnings growth in this environment of rising interest rates and commodity prices, whereas tech is a bit more challenged as goods demand begins to slow.”

Meanwhile, an index tracking future domestic economic conditions grew in December, pointing to still-solid growth trends in the U.S. even amid fears about Omicron, inflation, and a more hawkish monetary policy.

The Leading Economic Index (LEI) gained 0.8% in December, matching consensus estimates, according to Bloomberg data. This picked up from November’s 0.7% clip, which was downwardly revised from the 1.1% gain previously reported.

“The U.S. LEI ended 2021 on a rising trajectory, suggesting the economy will continue to expand well into the spring,” Ataman Ozyildirim, senior director of economic research at The Conference Board, said in a press statement.

“For the first quarter, headwinds from the Omicron variant, labor shortages, and inflationary pressures—as well as the Federal Reserve’s expected interest rate hikes—may moderate economic growth,” Ozyildirim added. “The Conference Board forecasts GDP growth for Q1 2022 to slow to a relatively healthy 2.2 percent (annualized). Still, for all of 2022, we forecast the US economy will expand by a robust 3.5 percent—well above the pre-pandemic trend growth.”

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