The Xchange Blog

How Much Longer Can This Rally Last? Consider SPDN.

The market has seemingly done a complete about-face following the bloodbath that was the waning months of 2018. Since the December 26th session, the S&P 500 finished higher 14 of 16 trading days and recaptured nearly half of the losses it sustained by its December 24th low.

Were our fears of a recession overblown? Quite possibly, but that doesn’t mean the current comeback isn’t also a symptom of an uncertain economic picture.

First, consider exactly where the S&P 500 is relative to its prior performance. Take a look at the chart below, which show the past 13 months of the S&P 500 alongside the performance of the Direxion Daily S&P 500 Bear 1X Shares (NYSE:SPDN), which attempts to return the inverse of the daily performance of the S&P 500 Index.

With a net expense ratio of just 45* basis points, SPDN is the lower cost alternative to other inverse ETFs that track the index.


Data Range: 12/22/2019 – 1/22/2019. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For standardized performance and the most recent month-end performance,
click here.

 

One of the most striking things you might first notice in the chart is how close to parity the index and its counterpoint have been since October. The two charts rebound off one another’s 2018 entry three or four times between mid-October and the end of November before finally making a definitive cross in December.

But what’s truly telling about this chart is what took place, and is taking place, in January of each year. Over both January 2018 and January 2019, the market exhibited large and consistent growth over a fairly extended period of time.

Between the 21 days that spanned the open on January 2nd and the close on the 31st, the S&P 500 gained more than 5.5 percent. Prior to the 29th, it was actually on pace to post over 6 percent for the month prior to the 29th.

Compare that to the recent rally, which, between the 2nd and the 17th, has put the index up 5.8 percent. Pulled back to include the final few days of December, that pace increases to more than 11.5 percent over 16 trading days. While some of the daily gains have been larger than others, that is a lot of ground to cover in a short period of time.

Finally, there’s the chart parity. Both the index and the bear fund are again approaching a cross at their 2018 starting prices. Bear in mind that CBOE’s volatility index is still about where it was through October and November, 2018, which coincided with some of the market’s biggest down days of the year. As in previous months with heightened volatility, it might not be entirely odd to see similar dramatic volatility in the months to come, as buyers and sellers fight it out as to whether to dig further out of the 2018 hole.

However, that is all based on historical information and trend. What might truly turn the market back to the negative is economic, governmental and global unrest.

We touched on the economic aspect. Despite the renewed enthusiasm among traders, economists still anticipate a recessionary period to start by 2020. The prospect of a recession is also the main cause of anxiety among CEOs, which will certainly play into their forward year spending plans. Even the hawks leading the Fed have become more dovish in tone at the possibility of a slowdown hitting the economy before the year is out.

As for political troubles, the longest government shutdown is nearing a full month and shows no signs of ending as of this writing. Adding to the already bleak image the shutdown paints of those at the levers of power in the U.S., the White House recently released a heightened figure estimating the negative impact the shutdown could have national productivity, about -0.13 percent a week, nearly double their original estimate.

Add to that a still growing funding deficit — exacerbated by 2017’s tax cuts — an ongoing investigation into connections between Russian interests and President Donald Trump’s 2016 election campaign and a newly Democratic House of Representatives with the power to subpoena the President’s tax returns and relevant financial records. It doesn’t take a vivid imagination to picture things becoming much more chaotic in Washington over the course of the year.

Finally, there’s simply the fact that, while the U.S. exhibited impressive economic growth over 2018, much of the other world economies were already feeling the effects of a tightening economic environment. India began the year with strong GDP figures, but uneven productivity and currency problems held it back in the following quarter, which only grew about 1.6 percent last year, in the global rankings. Germany posted its lowest growth in five years while China had its worst growth year in nearly 30.

This ultimately brings us to the ongoing trade war between the U.S. and China, which also has no end in sight. Adding salt to the trade wounds are other continued disputes between the U.S. and several of its other trading partners. This includes Canada and Mexico, which still have tariffs on several of their main exports, as well as Britain and the EU.

The point is, the market isn’t out of the woods yet. Lagging signals like economic data and corporate data might not be showing the effects of all of these events, but it’s hard to believe the bill won’t come soon.

If you’re a tactical manager anticipating a broad market pullback, or running a long/short or sector rotation strategy, SPDN: Direxion Daily S&P 500®  Bear 1x Shares may help you seek a more cost effective way to hedge and make changes to asset allocations in your portfolio.

* The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.45%. The Fund’s adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Fund for Other Expenses through September 1, 2019, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.45% of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap nancing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses). If these expenses were included, the expense ratio would be higher.


Each leveraged ETF seeks investment results that are 300% of the return of its benchmark index for a single day. Each Fund should not be expected to provide returns which are three times the return of benchmark’s cumulative return for periods greater than a day. Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment.
 
SPDN Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The Fund does not attempt to, and should not be expected to, provide returns that correspond to the inverse of the performance of its underlying index for periods other than a single day. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Counterparty Risk, Shorting Risk, Cash Transaction Risk, Intra-Day Investment Risk, Daily Inverse Index Correlation/Tracking Risk, and risks specific to the securities that comprise the S&P 500® Index. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
 
S&P 500® Index (SPXT) – Standard & Poor’s® selects the stocks comprising the S&P 500® Index (SPXT) on the basis of market capitalization, financial viability of the company and the public float, liquidity and price of a company’s shares outstanding. The Index is a float-adjusted, market capitalization-weighted index. One cannot directly invest in an index.