Inverse ETFs For April Showers
Yes, April is just days old.
And yes, Wednesday's declines come on the heels of the S&P 500 touching a new record high on Tuesday. So perhaps it is too early to get worked up about April being a bad month for stocks.
Historically, April is actually a good month for the bulls as the fourth month of the year is last month in the best six-month cycle in which to be long equities. On the other hand, that does not mean the broader market rises every April. Additionally, fortune favors the prepared and with that in mind, traders will want to consider the following inverse ETFs if Wednesday's glum price action is repeated throughout this month.
The first sign of weakness was easily spotted during the first quarter when the Materials Select Sector SPDR (NYSE: XLB) was the worst-performing of the nine sector SPDRs funds.
The negativity surrounding this sector has accelerated in recent days. With regards to SMN, this ETF is the inverse, double-leveraged play on the Dow Jones U.S. Basic Materials Sector Index. That is the same index tracked by the iShares Dow Jones U.S. Basic Materials Sector Index Fund (NYSE: IYM).
While IYM is about two-thirds allocated to chemicals names, it is vulnerable to being a baby thrown out with the materials sector bathwater. The ETF is not particularly heavy on coal and steel names, but it includes a few such as Consol Energy (NYSE: CNX), Cliffs Natural Resources (NYSE: CLF) and U.S. Steel (NYSE: X) further down its lineup.
That is bad news for IYM, but good news for traders that opt to give SMN a short-term spin. Multiple steel names are trading at multi-month or multi-year lows. Coal equities and the corresponding ETF are in bad shape as well, buoying the short-term bull case for SMN.
ProShares UltraShort MSCI Brazil (NYSE: BZQ)
Speaking of weakness in the materials sector, Brazil's Vale (NYSE: VALE), the world's largest iron ore maker, is lower by 20 percent in the past 90 days. And that is with the benefit of Wednesday's two percent gain.
Two Vale securities account for 9.7 percent of the weight of the iShares MSCI Brazil Capped Index Fund (NYSE: EWZ), making the stock that ETF's second-largest holdings behind another epic Brazilian disappointment, Petrobras (NYSE: PBR). The simple way of explaining BZQ is that is that is essentially the double-leveraged, inverse equivalent of EWZ.
The cautionary tale with BZQ is that it is thinly traded (average daily volume of just 13,640 shares) and that can make for some large intraday moves on a print-by-print basis. The upside is that Brazil continues to be a laggard in 2013, the largest emerging markets of which Brazil is one have been slack performers and there is little reason to be long materials, EWZ's second-largest sector weight. All those factors play in BZQ's favor.
Direxion Daily Gold Miners Bear Shares (NYSE: DUST)
Things are getting worse for gold. The SPDR Gold Shares (NYSE: GLD) is playing a dangerous game with support in the $150 area and a move below that level would likely invite increased selling pressure. GLD is off 2.6 percent in the past week.
A familiar situation is playing out in the gold pits that means DUST could have plenty more upside ahead of it and that is saying something because the ETF has more than doubled year-to-date. While GLD is down 2.6 percent in the past week, the miners are once again performing worse. Much worse. Much worse as in the Market Vectors Gold Miners ETF (NYSE: GDX) is down 7.4 percent in the past five trading days.
In anecdotal evidence regarding investors' disdain for gold miners, the Direxion Daily Gold Miners Bull 3X Shares (NYSE: NUGT) underwent a reverse split on April and open for trading at a post-split price of just over $25 on Tuesday. NUGT is already flirting with $21.
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