Major Indexes Continue To Be Outperformed By Energy & Metals

ETFs like XOP (S&P Oil & Gas Exploration & Production), XME (S&P Metals & Mining), and XLU (Utilities) have been experiencing capital inflows. At the same time, other ETFs such as DIA (30-Industrials), SPY (500-Large Caps), IWM (2000-Small Caps), IYT (Transports), and QQQ (100-Nasdaq Largest Non-Financial) are still in the red for the year.

Our positions in energy and precious metal ETFs netted us a positive return, while our recent trades in the major stock index ETFs had already booked partial position profits, with the remainder of the positions stopping out for a small break-even profit.

As we experience record inflation numbers reported and central banks raising their lending rates, we are keeping our cash ready and closely monitoring key ETF sectors as compared to the major stock index benchmarks for clues regarding our location within the overall economic cycle.

SPY – SPDR S&P 500 ETF TRUST – DAILY SECTOR COMPARISON CHART

Major Indexes SPY

TheTechnicalTraders – TradingView

TACTICAL ETFs FOR ALTERNATIVE STRATEGIES

From time to time, we get questions from our subscribers regarding inverse and leveraged ETFs. Inverse and/or leveraged ETFs are not appropriate for everyone. However, for some experienced traders, these tactical ETFs can provide alternative strategies for use in a bear market.

An inverse ETF is an exchange-traded fund (ETF) constructed by using various derivatives to profit from a decline in the value of an underlying benchmark. Inverse ETFs allow investors to make money when the market or the underlying index declines, but without having to sell anything short.

A leveraged exchange-traded fund (ETF) is a marketable security that uses financial derivatives and debt to amplify the returns of an underlying index. While a traditional exchange-traded fund typically tracks the securities in its underlying index on a 1:1 basis, a leverage ETF may be structured for a 2:1 or even a 3:1 ratio.

These ETFs listed below track the underlying S&P 500 benchmark that represents 500 US large caps as selected by S&P’s Index Committee. These ETFs are examples of both inverse and leveraged ETFs:

  • SPY vs. SH (1:1 or 1x leverage) – SPY (Bull) is the most recognized ETF and is typically listed in the top ETFs for the largest AUM and greatest trading volume. SH (Bear) provides 1:1 inverse exposure to the S&P 500.
  • SSO vs. SDS (2:1 or 2x leverage) – SSO (Bull) seeks a daily 2x return of the S&P 500. SDS (Bear) provides 2:1 inverse exposure to the S&P 500.
  • UPRO vs. SPXU (3:1 or 3x leverage) – UPRO (Bull) seeks a daily 3x return of the S&P 500. SPXU (Bear provides 3:1 inverse exposure to the S&P 500.

SPY – SPDR S&P 500 ETF TRUST – DAILY S&P 500 COMPARISON CHART

The following chart gives us a visual of how the ETFs mentioned above are performing against each other over the past 15-months. It should be noted that inverse ETFs carry unique risks that traders should be aware of before participating in them. Some of the risks associated with inverse ETFs are compounding risk, derivative securities risk, correlation risk, and short sale exposure risk.

Major Indexes SPY

TheTechnicalTraders – TradingView

KNOWLEDGE, WISDOM, AND APPLICATION ARE NEEDED

It is important to understand that we are not saying the market has topped and is headed lower. This article is to shed light on some interesting analyses of which you should be aware. As technical traders, we follow price only, and when a new trend has been confirmed, we will change our positions accordingly. We provide our ETF trades to our subscribers, and in the last six trades we entered in March, all have now been closed at a profit! Our models continually track price action in a multitude of markets, asset classes, and global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.

Successful trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.

WHAT STRATEGIES CAN HELP YOU NAVIGATE The CURRENT MARKET TRENDS?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

Historically, bonds have served as one of these safe-havens, but that is not proving to be the case this time around. So if bonds are off the table, what bond alternatives are there and how can they be deployed in a bond replacement strategy?

We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

 

Relative Strength Chart Reveals Nasdaq Is Losing Its 20 Years of Leadership

After the burst of the dot-com bubble in early 2000 as shown in the monthly ratio chart (IXIC/SPX) between Nasdaq Composite (IXIC) and S&P 500 (SPX), Nasdaq was underperformed S&P 500 until the swing low formed in 2002. Refer to the relative strength chart (IXIC/SPX) below:

Relative Strength Between Nasdaq & S&P 500

Despite IXIC/SPX is a ratio chart, Wyckoff price structure together with Wyckoff events can be observed throughout. After the selling climax (SC) formed in April 2001 as reflected in the huge bearish price spread with acceleration to the downside, an automatic rally stopped the downtrend and into a trading range.

After a secondary test in September 2002, a sign of strength rally (SOS), which is classified as the best rally within the trading range broke above the resistance followed by a shallow backup action (BU) trading range until 2009. This is a classical Wyckoff accumulation structure pending the start of the markup phase, which is the beginning of the uptrend.

Nasdaq composite started to lead the S&P 500 since 2002 as it formed a higher high and a higher low subsequently.

The uptrend manifested after a breakout from the backup trading range in 2009 and accelerated in 2014-2018. After the COVID-19’s bottom in March 2020, there was a potential final speculative run up forming a buying climax (BC) in February 2021, barely touch the swing high formed in 2000, which acted as a resistance.

Next, a change of character, which is the largest down wave (as highlighted in orange) since the bottom in 2002 kicked in followed by an inability to rally up (as highlighted in blue) between May to November 2021, suggested more weakness ahead in Nasdaq Composite against S&P 500.

Should the relative strength chart (IXIC/SPX) break below the support (as annotated in horizontal brown line), it is likely to head down to test the lower support (as annotated in horizontal green line).

This could be a market rotation scenario as shown in my video last week or it could mean Nasdaq will drop more than S&P 500 should a market correction begin. Either way, Nasdaq Composite is expected to underperform S&P 500 and losing its 20-years of leadership since 2002 based on the relative chart (IXIC/SPX).

Price Target for IXIC/SPX with Point & Figure Chart

As relative strength chart is still unfolding and the support is not broken yet, it is still possible for the price to bounce up to higher target. Point and Figure (P&F) chart is a tool in price action trading with Wyckoff Method as traders can project the price target based on the causes built according to the Wyckoff’s Law – Cause and Effect. Let’s examine if there is enough fuel in the tank for the price to go higher in this relative strength chart.

As shown in the point and figure chart above, the original segment (in blue) was used in the calculation. The price targets based on the blue segment, which is the accumulation structure, are 3.5-3.75. The next segment (in orange) based on the re-accumulation structure, works out to be 3.45-3.65, which acted as a confirming count to the original segment.

The price targets from these two segments coincide with the resistance at 3.6 as formed by the previous high during the internet dot-com bubble in 2000. The fuel in the tank for the upside price target has been consumed as confirmed by the pullback in February 2021 once it hit the price targets.

It is crucial to pay attention to the next price action to confirm if the support will be broken with more weakness ahead or another trading range will be formed from here on to build up more causes for the next up move.

SPXU: Harnessing Volatility in The S&P 500, to Short the Market With a Three Times Inverse ETF

Fed Chairman’s Powell reassuring statement on Tuesday and inflation figures for 2021 being in line with estimates on Wednesday seem to have appeased bearish sentiments resulting in the S&P 500 rising.

However, there are many different elements that are likely to impact stocks, such as the continuation of the economic recovery, corporate earnings, inflation, supply chain concerns as well as the likelihood of the Omicron variant stressing hospital services. These should result in continued volatility episodes as seen in the S&P 500 ETF Trust ETF (SPY) which tracks the S&P 500 index.

https://static.seekingalpha.com/uploads/2022/1/12/49663886-16420000045920553.png

Source: fxempire.com

In such conditions, people are normally risk-averse, or avoid trading and prefer to wait for some relative calm before looking at stocks. This is the case for most of us, but, there is another option which is to trade the volatility using a tool like the ProShares UltraPro Short S&P500 (SPXU) which inversely tracks S&P 500 at -3 times its daily performance.

This calls for enticing gains as a 5% fall in the SPY can “theoretically” bring you 15% gains, but my own experience has taught me that just putting money in the SPXU at the first sign of a market downturn is unproductive. Instead, I use the chart below which shows the performance of the ProShares ETF from January 2020 to date. It includes the spring 2020 crash subsequent to the World Health Organization declaring Covid to be a pandemic.

Investors will notice that I have calculated the amplitude obtained by subtracting SPXU’s daily low from the daily high. Then I converted the resulting value as a percentage that more vividly represents the volatility induced in the ProShares ETF’s through its daily variations.

Here, the March (spring) 2020 crash resulted in gains of over 30% but this was achieved over a period of many weeks. The second noteworthy point is the above-10% differences which, after occurring four times from June 2020 to February 2021, ceased till November last year.

https://static.seekingalpha.com/uploads/2022/1/12/49663886-16420000046728988.png

Source: Chart built by author with data from finance.yahoo.com

Then, came the December 1 market downturn, induced mostly by tech stock aversion, as investors increasingly rotated into value names. To be realistic, this high-volatility episode may prove to be a lone occurrence, but forthcoming events should constitute catalysts for further fluctuations.

First, the earnings season is to be kicked off by banks on Friday this week, and with investors having already placed a lot of expectations on the financial sector as the main beneficiary of the economic recovery and this, thanks to rising interest rates allowing an increase in net interest margins on loans.

This expectation may suffer if megabanks like JPMorgan Chase (JPM) Citigroup (C) and Wells Fargo (WFC) fail to provide any upside surprises in their fourth-quarter earnings reports. Others like the Bank of America (BAC) and Morgan and Stanley (MS) will follow suit. Then, it will be the turn of the big techs with Microsoft (MSFT) on Jan 25 and Apple (APPL) on Jan 29, with analysts being keen to observe for any effects caused by the semiconductor supply crunch.

Second, there is the VIX (Volatility indicator) also referred to as the “index of fear” whose methodology is based on the stocks forming part of the S&P 500. Higher is the VIX, more are volatility risks, and from its high of 35, the indicator is currently at around 18. Given that this figure is far from the VIX’s above- 85 spike during the spring 2020 market crash, a major downside does not seem imminent, but a near-20 value signifies that volatility is persisting.

This signifies that we are in an environment conducive for gains through the SPXU.

Pursing on a cautionary note, I deliberately used the word theoretically above when mentioning possible gains with the SPXU. In this case, a 5% loss in the SPY will not convert into a 15% gain in the SPXU as some percentage points will be lost due to the compounding effect which is a specific feature of highly leveraged ETFs. The net gain will ultimately depend on the degree of fluctuations (volatility) during the trading period. This discrepancy is evident in the one-week performance chart below where a -1.39% loss of the SPY has not translated into a 4.17% (1.39 x 3) gain in the SPXU, but only a 4.15% gain.

https://static.seekingalpha.com/uploads/2022/1/12/49663886-164200000530492.png

Source: Trading View

Considering the long term, due to the leverage, the ProShares fund has delivered a 55% loss and thus, a buy-and-hold strategy is to be avoided, and it is preferable to use this market shorting tool for the least amount of time possible, preferably one day as per the prospectus. This said I have held it for up to five days after gaining some experience selling it at a loss due to the unpredictability of the market. Looking at portfolio protection, some investors also use the SPXU as a hedging tool to gain from a falling S&P 500. Thus, by hedging, these investors hold on to their stocks instead of passively selling them and taking profit in the expectation of an elusive market crash.

Finally, my advice is to wait for the VIX to go above 20 before placing your bet, and this should happen this week or the next. Also, patience, rigorous monitoring and being prepared to exit with a loss are key ingredients for shorting the market.

Disclosure: I/We are long Apple. This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.