Best ETFs For a Pullback: SDS, TLT, GLD, VXX

Our Strategies work regardless of market direction or economic conditions

Home » News Home » Best ETFs For a Pullback: SDS, TLT, GLD, VXX

FREE REAL TIME TRADING REPORTS
These reports, based on our technical analysis, include precise entry levels and target prices, and help investors manage risk and realize reward. Click the symbol of your choice to receive a real time update.

January 13, 2012 at 09:12 AM

BY Dennis Hobein - Contributor, Stock Traders Daily

Subscribe to RSS

Our Trading Reports in this Article:

Sometime in December, the job and housing markets finally recovered, our overwhelming national debt was paid off, Europe’s sovereign debt woes were ironed out, and China’s growth was guaranteed for the foreseeable future. Yes, that is a heavy dose of sarcasm, but my point is, there has been a sudden shift in investor sentiment to the bullish side despite the fact that there are red flags all over the place. It is true that the last couple of monthly jobs reports have improved – the unemployment rate has been steadily dropping, currently at 8.5% -- and it appears the housing market has at least bottomed out. Those are encouraging signs, but the question is, are the improvements sustainable?

We are only very early in the fourth quarter earnings season, but already we have seen plenty of warnings from companies, across a spectrum of industries. Specifically, companies have been complaining about margin compression, which isn’t surprising, given that wages have not risen at a meaningful amount and consumers are still on the hunt for bargains.

In a recent email to his subscribers, Tom Kee, Jr, President and CEO of Stock Traders Daily, commented: “Realistically, the aggressive buying in retail stocks that occurred late in 2011 was not justified because margins are contracting in that industry. Interestingly, Microsoft said the same thing about the technology industry and today after the close, Chevron said the same thing about energy. I expect this same theme to continue throughout earnings season and I expect margin pressures across almost every industry and business segment. I also expect forward guidance to be questionable at best and that should bring into question market multiples for the calendar year.”

With that in mind, here are a few ways to play the market to the downside:

Going Short the S&P 500
One of the more straight forward ways to profit from a downturn in the market would be to buy the ProShares UltraShort S&P 500 ETF (NYSE: SDS). This is a leveraged ETF, meaning that it corresponds to two times (200%) the inverse of the daily performance of the S&P 500. Interestingly, SDS is currently trading at all-time lows, so buying shares at this level would be a cheap way to buy some insurance for your portfolio.

Bet on Volatility
The markets have “calmed down” recently, but, that is not expected to continue. As long as troubling headlines continue to pour out of Europe, the stock market will likely experience heightened volatility. One widely-used tool to guard against this volatility is the iPath S&P 500 VIX Short Term Fund (NYSE: VXX), which reflects the implied volatility of the S&P 500. This seems to be an ideal time to consider VXX as it has just bounced off near-term support at the $30 level.

A “Risk-Off” Play
Despite trading at what are effectively negative real interest rates, investors continue to flock to bonds and treasuries as a safe-haven investment. After surging throughout the summer and fall of 2011, the iShares Barclays 20 Year ETF (NYSE: TLT) has cooled off, consolidating in the $115-$125 area. However, a break-out above that trading range could be in the cards if the markets begin to melt-down as investors park money in “risk free” investments.

Gold Lost Some Luster, But Worth Another Look
Gold was the darling of 2011, rocketing higher as investors ditched fiat currencies for the lure of hard assets, such as precious metals. The primary gold ETF is the SPDR Gold Trust (NYSE: GLD), which gained as much as 32% from January through early September last year. However, GLD has fallen out of favor since then as prospects for rampant inflation have waned in the near term, and due to concerns of a “bubble” in precious metals. However, 2012 could be another good year for GLD as the Euro continues to unravel and as dollar strength remains constrained due to the soft economy here and the massive deficit.

Read some of our Proprietary Reports with a Free Trial:

2010 - The Year of the Increase - A precursor to market action in 2010
Top of the Market to you - Round 2 - Proves the next major top.
S&P historical Valuation Comparisons - Compares today's market to past environments.
Expect M&A to increase as revenue growth becomes tight (August 2010)