Grab These Leveraged ETFs Before It's Too Late
U.S. stocks sank Wednesday after Federal Reserve meeting minutes showed the central bank may ease or even cease its $85 billion-a-month bond-buying program before the world's largest economy truly gains momentum.
At least that is the catalyst most often tossed around in the financial media today for the glum action in equities. With that, a case can be made that Wednesday's decline was a one-off event. After all, stocks have impressed this year as the S&P 500 is still up up about 3.5 percent year-to-date.
Then again, there are signs that select asset classes could see more near-term downside. For the agile trader, leveraged ETFs could be the instruments with which to exploit further short-term weakness in riskier assets. Consider the following group:
Direxion Daily Emerging Markets Daily 3X Bear Shares (NYSE: EDZ) Before establishing a bearish position within the emerging markets universe, traders should note a couple of things. First, plenty of pundits have recently been clamoring about weakness in emerging market equities. Those statements are broad in stroke and ignore obvious strength in select markets and the ETFs that track those markets such as the Philippines and Thailand.
Second, traders need to remember what ETF many institutional investors use for emerging market exposure. That being the iShares MSCI Emerging Markets Index Fund (NYSE: EEM). EEM is dominated by four countries – China, South Korea, Brazil and Taiwan. The four major ETFs tracking those nations are all in the red year-to-date.
And that is why EDZ makes the cut here. The ETF attempts to deliver three times the daily inverse performance of the MSCI Emerging Markets Index, the index tracked by EEM. Persistent weakness in the aforementioned quartet of countries will be a drag on EEM, but a boon for EDZ. On a related note:
ProShares UltraShort FTSE China 25 (NYSE: FXP) Just went it looked safe to be long Chinese stocks and ETFs, the reverse has proven true. China ETFs finished 2012 in strong fashion, but have been outright laggards in 2013. With a loss of one percent on Wednesday, the iShares FTSE China 25 Index Fund (NYSE: FXI), the largest China ETF by assets, is now down nearly 6.8 percent year-to-date.
FXI has violated its 50-day moving average and could fall another seven to eight percent before finding its next support area. Split the difference and say FXI falls another 7.5 percent and FXP should (emphasis on "should") deliver gains in the area of 14 to 15 percent. FXP is designed to deliver twice the daily inverse returns of the index FXI tracks.
PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) For the most part, West Texas Intermediate futures have performed admirably this year. Even with Wednesday's 2.3 percent loss, the U.S. Oil Fund (NYSE: USO) is still up 1.8 percent year-to-date. However, crude futures are now a facing some concerning fundamental and technical scenarios.
On the fundamental side, any hints that the Fed is close to ending its bond-buying activities will likely boost the dollar. As it is, the PowerShares DB US Dollar Index Bullish (NYSE: UUP) is up 1.3 percent in the past week alone. Second, any signs that global growth is slowing will give traders reasons to depart riskier assets such as oil.
On the technical side, WTI futures are struggling to break through the $97 area. Wednesday's slide below $95 per barrel may be a sign traders have thrown in the towel on $97 and are ready for more downside. Good news for DTO, which is designed to deliver twice the daily inverse performance of the Deutsche Bank Liquid Commodity Index. That index is composed of WTI futures contracts.
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