Is a 20% Drop in the S&P 500 Coming? 1 ETF to Play It | ETF Trends

Shorts could be salivating if the S&P 500 drops 20%, according to the chief market strategist at FS Investments. If that’s the case, then keep the Direxion Daily S&P 500 Bear 3X ETF (SPXS) handy.

The S&P 500 is up about 8% for the year, rallying after inflation fears and rising interest rates helped to cause a dismal 2022. However, at some point, what goes up must eventually come down, and a correction could be forthcoming.

“There’s no reason to wait. It’s not like you’re going to leave 10% upside on the table,” said Troy Gayeski, chief market strategist at FS Investments, during Bloomberg’s “What Goes Up” podcast.

Gayeski noted that if investors are mulling over selling for a profit, then that time could be now. Recession talks have been amplifying as the Federal Reserve toes the line between raising interest rates and stifling economic growth.

“First of all, the strongest rallies have always been in bear markets,” Gayeski added.

“Usually they’re driven by technical factors. And then there’s a narrative that’s put together to justify it: the more recent one was that inflation’s going to slow enough that the Fed won’t have to hike anymore, and then we’re going to have a recession and somehow that’s going to cause the Fed to cut rapidly. But recessions aren’t bad for revenue or earnings? It really makes very little sense,” he added.

Thrice the Inverse of the S&P 500

SPXS provides traders with triple leverage if the S&P 500 heads downward, offering the chance to maximize profits on bearish bets. That said, it should only be used by savvy investors comfortable with the risks associated with leveraged trading.

That said, the fund could see significant upside if prognostications are correct for future weakness in the S&P 500.

“We’ve always thought that this bear market would be meaningfully worse than the 2018 correction or some of the shocks we had in the post-Great Financial Crisis period, but not as bad as we had from 2002 and also the financial crisis,” Gayeski said.

“This is a golden opportunity to use this bear market rally to de-risk in advance of potentially very painful losses over the next six, nine, 12 months,” he added.

For more news, information, and analysis, visit the Leveraged & Inverse Channel.