The Xchange Blog

October is For Traders

Rising Rates, Earnings and the Wall of Worry

We’ll, it is October after all. Halloween is almost upon us, as traders tip toe through arguable the most feared month of the year for market participants.  There have already been a few tricks, as market volatility rises.

In a potentially ominous sign for stocks, the surge in Treasury yields early in the month was mostly driven by a jump in the inflation-adjusted yield. Traders keep a close eye on real yields because they’re a clue to how much the Fed’s interest-rate increases have tightened financial conditions.

Of course real yields tend to climb during periods of growth, but an accelerated rise can be a threat to businesses accustomed to comparatively cheap credit. With the 10-year real yield breaking above its five year trading range, that could mean trouble for stocks. Worried? Click here  

So far, earnings season has traders on the edge. Investors will be sifting through piles of earnings announcements for the next two weeks as the third-quarter reporting season accelerates. More than 150 companies are on tap to announce financial results. Total Q3 earnings for the S&P 500® Index are expected to be up 17.6% from the same period last year on +7.3% higher revenues. That would be the 6th time in the last 7 quarters of double-digit earnings growth.

As a reminder, here’s a table identifying the percentage of names in each index that is reporting, arranged by trading week.

Source: Bloomberg

As world economic and geopolitical events continue to build the wall of worry, even Wall Street’s “smart money” is skeptical as we trade deeper into Q4. According to Bloomberg, Mike Wilson at Morgan Stanley urged investors to stay put, calling rallies such as last Tuesday’s (10/16) “a dead cat bounce.” Technology and consumer-discretionary stocks, market leaders in the past few years, may need to fall an additional 6 percent to 8 percent before bottoming, he said. In the same article, Goldman Sachs’ David Kostin advised caution, noting that Midterm elections are likely to be a source of volatility, too, as Democrats capture the House, setting the stage for battles over regulations and spending.

Typically during this stage of an election cycle, market volatility usually picks up as uncertainty on policy builds. Once the outcome of the voting is known, stocks stage a rally, with the S&P 500 rising an average 8 percent in the fourth quarter, according to Bloomberg.

What about this time? Will it be different? Who knows? Only one thing’s for sure: Traders, especially leveraged ETF traders, need to stay in front of their screens. 



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 investments. Due to the daily nature of the leverage employed, there is no guarantee of amplified long-term returns. Past performance is not indicative of future results.

An investor should consider the investment objectives, risks, charges, and expenses of Direxion Shares carefully before investing. The prospectus and summary prospectus contain this and other information about Direxion Shares. Click here to obtain a prospectus or contact Direxion at (877) 437-9363. The prospectus or summary prospectus should be read carefully before investing.

Direxion Shares Risks – An investment in the ETFs involves risk, including the possible loss of principal. Each ETF is non-diversified and includes risks associated with the ETF 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. Each Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of their underlying index for periods other than a single day. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, for each Bull Fund, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk, for each Bear Fund, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions.  In addition to these risks, there are risks associated with an ETF’s investment in a specific sector, industry, or stocks that comprise each Fund’s underlying index. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

The views in this material represent an assessment of the current market conditions and is not intended to be a forecast of future events. These views are intended to educated the reader and do not constitute investment advice regarding the funds or any security in particular. Past performance does not guarantee future results.