Market Overview

Don't Try to Catch These ETF Falling Knives

So far, 2013 has been a good year in which to be long equities. A year-to-date gain of 6.7 percent for the SPDR S&P 500 (NYSE: SPY) affirms as much. However, that does not mean all sectors and asset classes are working.

In fact, a screen for laggard ETFs shows nearly 80 funds are currently sporting year-to-date losses of 10 percent or more. Predictably, plenty of the members of that ominous list are leveraged ETFs, but a fair amount (more than 25 percent) are traditional ETFs.

There is plenty of time left in 2013 for some of these ETFs to get their respective acts together and move to the upside, but in the case of some (think gold miners), early-year damage says these funds are no more than falling knives right now. That is falling knives that investors should attempt to catch. Down appears to be the near-term path of least resistance for the following ETFs.

Direxion Daily Gold Miners Bull 3X Shares (NYSE: NUGT) The Direxion Daily Gold Miners Bull 3X Shares is arguably the epitome of an ETF falling knife in 2013. So bad have things gotten for this triple leveraged play that it will undergo a 1-for-5 reverse split on April 1.

That might be good news for eager shorts looking to pound NUGT from a higher price. Seemingly, the near-term view of gold miners as a group is quite simple. Gold futures are challenged on a technical basis and getting worse with almost every passing day. Since the miners did participate much in gold's upside, it is not surprising to see the group suffer as bullion tumbles.

Bottom line: The more fears escalate about gold's 12-year bull market coming to an end, the more the miners will suffer. Fortunately, traders do not need to short NUGT directly. They merely need to go long the Direxion Daily Gold Miners Bear 3X Shares (NYSE: DUST) to participate in more downside for the miners.

EGShares India Infrastructure ETF (NYSE: INXX) After ending 2012 in solid form, India ETFs have been epic disappointments in 2013. As is the case with NUGT, it is easy to understand why ETFs tracking Asia's third-largest economy have delivered no more than heartache to the bulls this year and the reasons extend beyond mere weakness in the broader emerging markets universe.

Taking a page from the U.S. handbook of electoral politics. India unveiled a larger-than-expected fiscal 2013-14 budget last week, which includes plenty of government spending ahead of next year's elections. There are several problems with that budget. First, financial markets have shown little tolerance for increased government spending in India.

Second, Fitch Ratings came right out and said India is in danger of losing its investment-grade credit rating. Third, India has well-documented infrastructure woes, but the new budget has done nothing to buoy the fortunes of INXX. The ETF has lost 4.2 percent in the past week and violated support at $13.50, indicating that its next stop could be the September low just under $12.

PureFunds ISE Junior Silver ETF (NYSE: SILJ) Talk about a case of bad timing. The PureFunds ISE Junior Silver ETF debuted late last year as a small-cap alternative to popular large-cap focused silver miner funds such as the Global X Silver Miners ETF (NYSE: SIL). Problem is silver, like gold, has been tumbling this year. The iShares Silver Trust (NYSE: SLV) is down almost 6.2 percent.

As has been the case with gold and the gold miners, silver miners are declining at a more rapid clip than prices of the metal they extract from the earth. Translation: SILJ is off 16.5 percent year-to-date. Some investors may be apt to avoid to SILJ simply because it is a new ETF. That misses the point. At the moment, precious metals miners as a group are not working for investors from the long side.

However, given silver's reputation for volatility, SILJ is worth tracking for a bounce and should not be dismissed as potentially profitable trade due to its age.

For more on ETFs, click here.

Posted-In: News Sector ETFs Short Ideas Specialty ETFs New ETFs Emerging Market ETFs Futures Commodities Best of Benzinga

 

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