Lately, traders are escalating their short selling of U.S. stocks. The total U.S. short interest exceeded $1 trillion this month, even as the S&P 500 Index has risen 4.4%, indicating a belief that the index’s 14% rally in 2023 might lose steam. As bearish bets increase, so does the likelihood for inverse ETFs to gather momentum in the near term.
Be Careful About a Narrow Market
The S&P 500 index’s rally this year has been centered on Nvidia, Meta, Tesla, Apple, Alphabet, Microsoft and Amazon. So, basically, we've got a narrow market, where a few winners are driving the rally. This is scary since if these stocks get overvalued and the economy lacks strength, the market will fall.
Wall Street legend Bob Farrell's rules for investing: markets are weakest when they narrow to a handful of big names, and strongest when they are broad also suggests the fragility of the S&P 500.
Analyst Warnings About High-Profile Stocks
Short sellers already incurred paper losses of around $101 billion this year. But they are still expecting the S&P 500’s impressive 2023 rally to fizzle out. This is because of the fact that the performance of the S&P 500 wouldn’t be enthusiastic without the contribution of seven big tech companies.
Now, many of these high-profile tech stocks indicate a bearish sentiment as most of these are overbought and overvalued. Analyst warnings, such as the recent downgrade of Tesla by Barclays Plc, thus enhances the case for the inverse ETF investing.
AI-Frenzy to Fizzle?
U.S. stocks have surged in 2023 due to better-than-expected earnings and a tech rally triggered by the boom in artificial intelligence (AI). However, some analysts believe that the AI-fueled rally might soon hit a bump.
Fed to Resume Rate Hikes?
Though the Fed has paused on its rate hike momentum in June, the U.S. central bank is likely to hike rates again this year. This could trigger a market downturn. Powell's warning of higher rates confirms the potential for market instability. In such a situation, inverse ETFs could benefit.
Ripe Recessionary Threats
Goldman Sachs believes that there is a 25% chance of a U.S. recession over the next 12 months, as quoted on Bloomberg. The banks also sees a 23% downside to stocks in a recession scenario, per a Bloomberg article. The bank’s strategists also opined that investors are heavily positioned in equities, leaving less scope for new buyers to enter the market and support the rally.
Against this backdrop, below we highlight a few inverse equity ETFs that should be kept a close tab on.
ETFs in Focus
Direxion Daily Semiconductor Bear 3x Shares SOXS – Up 14.7% past week
MicroSectors FANG+ Index -3X Inverse Leveraged ETN FNGD – Up 6.4% past week
Direxion Daily S&P Biotech Bear 3x Shares LABD – Up 4.9% past week
Direxion Daily S&P 500 High Beta Bear 3X Shares HIBS – Up 3.9% past week
ProShares UltraPro Short QQQ SQQQ – Up 1.6% past week
ProShares UltraPro Short Russell2000 SRTY – Up 1.4% past week
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN NRGD – Up 1.3% past week
ProShares UltraPro Short MidCap400 SMDD – Up 0.1% past week
Direxion Daily S&P 500 Bear 3X Shares SPXS – Down 0.5% past week
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Get it free >>Direxion Daily S&P Biotech Bear 3X Shares (LABD): ETF Research Reports
ProShares UltraPro Short Russell2000 (SRTY): ETF Research Reports
Direxion Daily S&P 500 Bear 3X Shares (SPXS): ETF Research Reports
ProShares UltraPro Short QQQ (SQQQ): ETF Research Reports
Direxion Daily Semiconductor Bear 3X Shares (SOXS): ETF Research Reports
ProShares UltraPro Short MidCap400 (SMDD): ETF Research Reports
MicroSectors FANG+ Index -3X Inverse Leveraged ETNs (FNGD): ETF Research Reports
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD): ETF Research Reports
Direxion Daily S&P 500 High Beta Bear 3X Shares (HIBS): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
