Major Escalation In Middle East Tensions Places Crosshairs On Direxion's Palantir-Focused Bull And Bear Funds

In a stunning move, President Donald Trump recently made arguably his most consequential decision by involving American forces in Israel's military campaign against Iran. On Saturday evening, the U.S. launched attacks on key Iranian nuclear sites, prompting a response by Iran's Foreign Minister Abbas Araghchi that all options to defend its sovereignty were on the table. Almost certainly, the decision to strike will have serious implications for defense-related stocks, putting Palantir Technologies Inc. PLTR in the spotlight.

From an economic standpoint, U.S. involvement in the Israel-Iran conflict threatens commercial activity on the Strait of Hormuz, a key waterway that is effectively a major artery for the world's oil trade. Days prior to the U.S. airstrike, Shell Plc SHEL CEO Wael Sawan warned about potential repercussions on global trade, particularly if the U.S. gets involved. With that concept firmly moving away from theoretical to actual, fears of retaliation could boost all defense stocks.

However, when it comes to Iran, the main concern has been the country's global terrorism network – a threat that Congress has analyzed at length for many years. As it turns out, one of Palantir's core products is Gotham, a platform that government institutions use to analyze counterterrorism and other attacks. With the Trump administration thrusting the country into a brave new world, it's quite possible that Gotham sales could increase, thus lifting PLTR stock.

Still, as cynically compelling as Palantir's bullish narrative may be, it's not without criticism. One of the more obvious concerns against PLTR stock is its valuation. Currently, the equity trades for nearly 600 times trailing 12-month earnings. To be fair, valuation metrics need to be taken with a grain of salt because the underlying business context may change, as has been the case for Palantir. Still, that's an awfully rich multiple that prices in practically perfect execution.

Another fundamental concern about PLTR stock is that the underlying enterprise relies heavily on government contracts. Furthermore, within this segment, most of the deals are signed with the U.S. government, accounting for over 50% of the company's revenue. While Palantir has been diversifying into the commercial sector, it's incredibly reliant on Uncle Sam. Therefore, issues such as budget constraints and political shifts could have a deleterious effect on PLTR.

The Direxion ETFs: Stated differently, while PLTR stock may benefit from increased relevance, enough concerns exist that pessimists have justification in their short thesis. For those who want to participate in the ebb and flow of PLTR, financial services provider Direxion offers Palantir-focused exchange-traded funds.

For bullish traders, they may be intrigued by the Direxion Daily PLTR Bull 2X Shares PLTU. This ETF seeks the daily investment results of 200% of the performance of PLTR stock. On the other end of the scale, the Direxion Daily PLTR Bear 1X Shares PLTD seeks 100% of the inverse performance of the namesake equity.

Primarily, both the PLTU and PLTD offer retail investors a convenient mechanism for speculation. Typically, those interested in utilizing leverage or engaging in short positions must trade options. However, the derivatives market features unique complexities that may not align with some investors' needs. In contrast, Direxion ETFs can be bought and sold much like any other publicly traded security. This attribute eases the learning curve.

At the same time, Direxion ETFs carry risks that market participants must consider. First, leveraged and inverse funds tend to be more volatile than standard funds that track major equity indices. Second, these specialized products are designed for exposure lasting no longer than one day. Holding the aforementioned ETFs longer than recommended may lead to value decay due to the daily compounding phenomenon.

The PLTU ETF: Easily one of the best-performing funds in the market, the PLTU ETF has jumped 132% since the beginning of the year.

Although PLTU suffered severe choppiness early in the year, the bull fund found significant momentum in early April. The latest geopolitical turmoil has only added to the trend.
From a technical perspective, there may be concerns that PLTU is overstretched, with the fund meeting resistance at the $70 level.

The PLTD ETF: On the other side of the table, the PLTD ETF has been a weak performer, losing more than 59% of value since the January opener.

As with its bullish counterpart, the PLTD ETF got off to a choppy start early in the year. However, since early April, the trend has been decidedly negative.
While the red ink has been ugly, the negative acceleration has slowed, possibly hinting at a future sentiment reversal.