Investors’ optimism about a breakthrough in trade talks between President Trump and his Chinese counterpart, Xi Jinping, at the G-20 summit in Argentina was short lived, with the major market indexes plunging over 3% Tuesday on an ominous signal from the bond market known as “inversion of the yield curve.” This is when the interest rate for the two-year government bond rises above that of the five-year Treasury note – indicating an imminent economic slowdown.
“Investors are questioning whether the Treasury market is telegraphing a more material economic slowdown,” Quincy Krosby, chief market strategist at Prudential Financial told USA Today. Other market commentators blamed the sell-off on trading algorithms tied to futures prices and a lack of buyer participation. Investors will closely monitor November’s jobs report released on Friday, in particular wage growth, to gauge whether inflation is gaining momentum, which may impede the Federal Reserve’s flexibility to raise interest rates slowly.
Traders who believe further falls lie ahead for the market should consider using inverse exchange-traded funds (ETFs) to bet against three sectors that have come under heavy selling pressure as “risk-off” sentiment has swept across Wall Street. Let’s look at three trading ideas.
Launched in early 2010, the Direxion Daily Semiconductor Bear 3X ETF seeks to provide three times the inverse daily performance PHLX Semiconductor Sector Index – making it ideal for traders who want an aggressive bet against the semiconductor sector. SOXS has ample liquidity with over 5 million shares changing hands per day. As of Dec. 6, 2018, the fund is down 26.24% year to date (YTD), but it has rallied 35.1% over the past three months as weakness in technology stocks continues. Investors pay a 0.98% management fee and receive a 0.31% yield.
The ETF’s share price tracked lower between January and the start of October before breaking above a significant downtrend line and the 200-day simple moving average (SMA) on above-average volume that indicates conviction from the bulls. The price recently found support from an uptrend line that extends back to early September. Those who buy at current levels could place a stop just below Tuesday’s low and look to book profits at the $16 level, where the fund’s price may encounter resistance from the October swing high.
The ProShares UltraShort Financials ETF, created in 2007, aims to return two times the inverse daily performance of the DJ Global United States (All) / Financials Index. The fund offers a play against major U.S. banking, insurance, real estate and investment companies, such as Bank of America Corporation (BAC) and Berkshire Hathaway Inc. (BRK.B). Despite a flat YTD return, the fund is up 14.28% over the past three months as of Dec. 6, 2018. SKS has an expense ratio of 0.95%, which is in line with the 0.94% category average.
SKF’s price has traded within a five-point range throughout most of 2018. The 50-day SMA has recently crossed above the 200-day SMA, in what technical analysts refer to as a “golden cross” – a bullish signal that suggests further upward momentum. The bears were unable to keep the fund’s price below an uptrend line dating back to mid-September, with the price closing above both moving averages on Tuesday’s market sell-off. Traders who wish to participate could sit stops just below the 50-day SMA – roughly the midway point of Tuesday’s wide-ranging day candlestick. Consider taking profits between $22.5 and $23, where the price is likely to find resistance from the February and September swing highs.
Formed back in 2010, the ProShares UltraShort Nasdaq Biotech ETF attempts to provide twice the inverse exposure to NASDAQ-listed biotechnology and pharmaceutical companies. The fund tracks the NASDAQ Biotechnology Index. BIS has a sizable average spread of 0.23%, making it more suited to swing trading than day trading. As of Dec. 6, 2018, the ETF charges a 0.95% management fee and has returned more than 22% over the past three months as riskier sectors have come under pressure. Investors also receive a 0.09% dividend yield.
A double bottom has formed on the BIS chart between September and October. After rallying sharply in October, the fund’s price has traded sideways as the 50-day SMA reverts upwards toward the 200-day SMA. Price has held horizontal line support at the $18 level, and like SKF, it closed above both moving averages on Tuesday. Traders who enter near the current price could place a stop-loss order toward the low end of Tuesday’s candlestick and set take profit orders at either $22 or 23.5 – both key resistance levels. Alternatively, traders could choose to scale out at these prices.