Investors Optimistically Terrified, but Tactical Moves Exist

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.) 

Markets
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…