Market Overview

Interesting Wednesday Action in Inverse ETFs

Interesting Wednesday Action in Inverse ETFs

On the back of some slack economic data, surging U.S. oil inventories and speculation that the Federal Reserve could end its bond-buying program as soon as this summer, U.S. stocks plunged Wednesday. The tumble came just a day after the S&P 500 touched a new record high.

One day of glum market action does not necessarily mean the start of an imminent, savage downturn. Still, Wednesday's action in select inverse ETFs may be a sign that more downside is on the way. At least for countries and sectors these ETFs track.

At this point, it should go without saying that leveraged ETFs, both the bullish and bearish plays, are short-term instruments. Knowing that, the plethora of critics this asset class has might be apt to say these ETFs are not the best harbingers of things to come. That point can be argued, but in the cases of select bearish funds, Wednesday's action was merely the extension of recent trends and those trends should not be ignored.

Bad Emerging Markets Continue to be Bad
Well-documented have been the struggles of the largest emerging markets, BRIC in particular, this year. That was again the case on Wednesday.

Start with the ProShares UltraShort Brazil (NYSE: BZQ). That double leveraged bearish play on sagging Brazilian equities, was up almost one percent Wednesday. Naysayers will point the below average volume and that is a fair argument.

On a related note, China bulls will not like the fact that the ProShares UltraShort FTSE China 25 (NYSE: FXP) gained 3.7 percent on more than double the average daily turnover. FXP also broke downtrend line resistance and could make a run to its 200-day moving average in the coming days.

The Direxion Daily Russia Bear 3X Shares (NYSE: RUSS) gained more than six percent on more than double its average daily volume while the Direxion Daily Emerging Markets Bear 3X Shares (NYSE: EDZ) added over three percent, also on better than double the normal trade.

Strong volume across EDZ, FXP and RUSS is not a good sign for BRIC bulls.

Energy Weakens
Name a major energy ETF and chances are it closed in the red Wednesday. The Energy Select SPDR (NYSE: XLE) and the Vanguard Energy ETF (NYSE: VDE) were both down more than 1.6 percent while the Market Vectors Oil Services ETF (NYSE: OIH) dropped 2.1 percent on volume that was about 25 percent higher than usual.

Again, just one day of price action is being referred to here, but energy has been one of the only higher beta sectors to show any leadership this year in what has predominantly been a low beta rally at the sector level.

Cause for concern? Maybe. The ProShares UltraShort Oil & Gas (NYSE: DUG) gained 3.3 percent on volume that was about 80 percent higher than usual.

The Golden Goose May be Cooked
It has been said that gold is a safe-haven investment. Lately, that has not been the case and it now looks like the SPDR Gold Shares (NYSE: GLD) and related ETFs are flirting with technical disaster. GLD lost 1.1 percent Wednesday on volume that was nearly 50 percent above the daily average.

On the other hand, the PowerShares DB Gold Double Short ETN (NYSE: DZZ) added 2.1 percent on volume that roughly 25 percent above normal. Things are far worse for the miners. The Market Vectors Gold Miners ETF (NYSE: GDX) plunged 4.5 percent on volume that 2.6 times above normal. The Direxion Daily Gold Miners Bull 3X Shares (NYSE: NUGT) tumbled nearly 14 percent to close at $20.52. Following a reverse split, NUGT opened for trading Tuesday at just over $26.

The Direxion Daily Gold Miners Bear 3X Shares (NYSE: DUST) loves all this. On better than double its average turnover, DUST jumped 13.4 percent Wednesday.

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