Technology earnings will kick off this week and if the prescience of some analysts proves right, then weakness in second-quarter earnings could put a bearish spin on major indexes like the S&P 500. As such, traders can look to the Direxion Daily S&P 500 Bear 3X ETF (NYSEArca: SPXS) for a leveraged inverse play.
As investors anticipate a global economic slowdown, trade wars, and now weaker-than-expected earnings, it could be stoking the fire for more gains for bears. Ahead of the start of second-quarter earnings, data compiled by Bloomberg showed that over 80 percent of S&P 500 companies who revised their profit estimates are expecting weaker-than-expected earnings.
Of the companies that have reported their second-quarter earnings, over 30 percent of them cite trade wars as the focal point of downward pressure.
“The 800-pound gorilla in the room and the easiest target out there is trade uncertainty,” said Wells Fargo Investment Institute’s Scott Wren. “You could think of a number of sectors where companies whose earnings are not great at least on a year-over-year comparison basis are going to use that scapegoat.”
SPXS seeks daily investment results equal to 300 percent of the inverse of the daily performance of the S&P 500 Index. The fund, under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the index equal to at least 80 percent of the fund’s net assets (plus borrowing for investment purposes).
Where can bulls look to for sector strength? Ironically, it’s technology and industrials, but there’s a double-edged sword wielding–these same sectors could also be the ones that are the most susceptible to market drawdowns during a protracted trade war.
“We want to be in sectors that are still sensitive to a continuation of this expansion. So, if we were to get some kind of pullbacks, we’re looking at that as an opportunity,” said Wren. “It’s just the nature of these kinds of earning seasons that companies try to hang their hat on something and try to find something to blame for poor results.”
Nonetheless, traders looking to capitalize on any short-term weakness in the S&P 500, can look to SPXS for opportunities.
“The market knows earnings are going to be lousy,” Wren said. “The market is looking beyond this and it’s looking at these macro issues and how are these trade headwinds going to affect overall global growth. They’ve been a real headwind.”
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