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Investors Optimistically Terrified, but Tactical Moves Exist

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As we near the end of Q1 in 2017, the post-election rally continues across broad-based indices, volatility is relatively low and investors are both optimistic and fearful for what’s to come. Some traders believe we are in for a 10-year bull market, while others await Armageddon, or at least a sizeable pullback in the near term. We can’t predict the future, but there are options for the tactical thinkers and longer-term solutions for portfolio protection out there on both sides of the trade. (Disclosure: I do suggest using Direxion products below, since those are the products I’m most familiar with. You can, of course, choose similar products from other manufacturers as you wish.) 

A rally in gold and bonds often signals a reversion. While this market has been anything but predictable, it is worth noting that gold and Treasuries have been up since the start of the year; that’s typically a bad sign for markets as it’s linked to an inverse relationship with the S&P 500. Both bonds and gold were oversold for the past few weeks. Many traders are concerned or preparing for a market pull back. If we continue to see a pattern, it may be time to hedge, or to participate on the downside in the short-term. 

Our first idea is a longer-term hedge solution. The Direxion Daily S&P 500 Inverse ETF (SPDN) is a great tool for any advisor who may have recognized upside gains in the S&P 500 equities rally and isn’t necessarily convinced of a pullback, but does want to position his portfolio to protect those unrealized gains in a cost-efficient way.

Now let’s think shorter term and tactically. Though some macroeconomic events may be a cause for concern, recent earnings rallies and a consistently low VIX tell another story. We saw broad-based indices rally further lately, off of positive earnings. In late February, we saw six of the major 11 S&P 500 sectors rally, the Dow climb to record highs while the dollar rose, and Treasuries fall ahead of the Trump administration’s outline of spending initiatives.

If a trader is looking at the market today, and believes that large caps and broad-based indices will rally in the short-term, using a Direxion Daily 3x leveraged ETF which tracks one of the positive movers, or the broad-based index itself, could be a fruitful short-term trade idea.

The tech sector has been the best performing sector in the S&P 500, up nearly 9% this year. But there are just a few big names driving the sector—Apple, Microsoft, Facebook and AT&T. These names are a majority of the index, and all may be overvalued, particularly if foreign production adds to operational cost with new administration policy, since a high percentage of tech manufacturing takes place overseas.

Traders should keep an eye on news around the top leaders. If all signs point to positive conviction, they should consider using Daily Technology Bull 3x Shares (TECL) in the short-term to benefit from momentum from earnings, growth or other factors keeping the top movers in a rally.

Conversely, to protect a portfolio that’s long, a trader can consider Daily Technology Bear 3x Shares (TECS), and a longer term hedge Daily Technology Bear 1x Shares (TECZ)—an inverse fund priced at 45 bps.

Then There Is Housing…

On an annualized basis, housing starts in January 2017 were 1.25 million compared to an consensus estimate of 1.23 million. Building permits also rose 4.6% to a one-year high of 1.28 million and above analysts’ estimate of 1.23 million permits. The housing starts represented a 2.6% decline on a seasonally adjusted annual rate, but well within expected market variation. Year-over-year, the housing starts data shows a 10.5% increase.

With the trade in full focus, improving housing data aids in understanding the strength of the economy and expectation of continual trend in economic related reflation trades. The current data on housing continue to support a steady growth in housing, specifically in single-family housing starts. While multifamily starts continued to be volatile, single-family starts, which account for the largest share of the residential housing market, are steady.

Current data shows that housing starts are currently above the 10-year average. Unsurprisingly, homebuilders are seeing positive assets flows. Fund flow statistics show a second consecutive month of positive inflow and a strong start to 2017.

Traders can use Direxion’s Daily Homebuilders & Supplies Bull 3x Shares (NAIL) for leveraged exposure to the Dow Jones U.S. Select Home Construction Index. 

Around the Globe

The MSCI Emerging Markets Index is up 7% through the end of February. The strong dollar is good for emerging markets, which have high level of dollar-denominated debt and exports.

And then there is Europe. Bloomberg data for daily polls on the French presidential elections currently show the populist front runner Marine Le Pen’s odds have risen to a 34% chance of winning. Although the shocks of Brexit and the U.S. election were quickly dissolved, the market risk and uncertainty of another populist agenda in Europe should not be understated. As markets continue to price in the probability of such scenarios, we could see an increase in volatility and a negative impact to developed equites.

Some potential tools to consider here would be: the Daily MSCI European Financials Bull 2x Shares (EUFL), and the Daily MSCI Developed Markets Bull 3x Shares (DZK) for the short-term bulls. However, an investment in Europe is likely a longer-term endeavor for most conservative advisors. It has been positioned as both a growth and value play. If traders would like to participate in that upside, but protect on the downside or for a bumpy ride, a longer-term hedging solution would be the Daily MSCI European Financials Bear 1x Shares (EUFS).  


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