Signs Traders Are Looking To Hedge In May With ETFs

Every year when May rolls around, investors hear plenty about selling in May and going away, but what about hedging in May? After all, there are scores of inverse and leveraged exchange-traded funds risk-tolerant traders can use to capture upside, assuming markets swoon in the second half of the year.

There is a case for examining such funds, and data indicate some traders are doing just that as the S&P 500 struggles to break through to new all-time highs.

“Investors looking at this triple top chart for the S&P 500, with its ominous, looming peak and may conclude that U.S. stocks are due for a correction. A triple top pattern in technical analysis is used to predict the reversal of a prolonged uptrend. It’s identified when the price of an asset creates three peaks at the same price level. The bounce off the resistance near the third peak is used by traders to anticipate the reversal of an uptrend. Most anyone you talk to thinks the odds favor some kind of pullback to come in the U.S. given their latest run. But as with any uncertainty, for traders there’s opportunity,” said Direxion, the second-largest issuer of inverse and leveraged ETFs, in a recent note.

How Do You Solve A Problem Like Technology?

A problem for stocks and broader equity benchmarks is the technology sector. The tech-heavy Nasdaq Composite is off nearly two percent over the past month while a batch of forgettable earnings reports from some of the sector's biggest names has the Technology SPDR (ETF) XLK down 5 percent over the same period.

Related Link: Sell In May? Averages For The Month Haven't Declined In 4 Years

That is problematic for broader indexes, such as the S&P 500, because the S&P 500 allocates 19.7 percent of its weight to technology stocks. That makes technology the benchmark U.S. equity index's largest sector weight by nearly 400 basis points over financial services.

Some traders are acting by moving into leveraged ETFs. For the 30-day period ended April 28, traders poured an average of almost $7 million a day into the Direxion Daily Large Cap Bear 3X Shares SPXS. SPXS attempts to deliver triple the daily inverse of the S&P 500.

Other Strategies

Trader also see the rally in small-caps waning and are ready to pounce with long positions in the Direxion Daily Small Cap Bear 3X Shares TZA. TZA, which seeks to deliver three times the daily inverse returns of the Russell 2000, has seen average daily inflows of $5.7 million over the past month, according to Direxion data.

At the sector level, traders are preparing for more downside in the already lagging financial services group. Over the past month, the Direxion Daily Financial Bear 3X Shares FAZ has averaged daily inflows of over $1.7 million, according to issuer data.