The Xchange Blog

When Volatility Reigns, Bold Trades Abound

Over the last two months, the market has been tailor-made for trading. 2018 has seen volatility in the market come back with a vengeance. The entire range of the VIX (Chicago Board Options Exchange SPX Volatility Index) for 2017 was 8.84–17.28, an incredibly low year for that measure. However, so far in 2018, we have already seen that range explode from 8.94 to 50.30 in early February. In fact, from February 5 to April 11, 2018, the VIX hit 20 or above on 33 days. Figuring out a sector’s direction has been even more important than ever. In this edition of the Xchange, we’ll take a look at some of the most volatile sectors in the last two months and whether or not the current earnings season will drain some volatility out of the market. The sectors we’ll focus on are financials, biotechnology, technology (including semiconductors), and gold miners.

Financials Can’t Miss. Or Can They?

Financials are now down 2% in 2018 as of April 11, but the drop from the highs of the year in January is over 9%. Until the Great Recession of 2008, we never really thought of financials as that volatile, but many different factors have been pushing and pulling on the names in 2018.

First, we had the run-up in rates to almost 3% in mid-February, followed by a fall back to 2.73% in early April. Slowly rising higher rates help banks make a better spread on what they lend versus what they borrow. But what really roiled the entire market was the talk of tariffs. Obviously, steel and aluminum tariffs don’t directly hit banks, but the concern is that an overall economic slowdown from a trade war will ultimately affect banks. Yet, in the background, there are still rumblings of decreased regulation.

The actual core business likely has some puts and takes. Trading is better for big asset managers and trading shops, while mortgages have fallen off with fewer re-financings and a tight housing market—all with the backdrop of solid 2%–3% GDP growth still forecasted for the year.

Will earnings season help or hurt? The good news is that the forward multiple for the group dropped to 13x from 15.5x in late 2017. Steady earnings and outlooks could help lower the volatility in the group. But the Trump administration’s policies remain a wildcard. Either way, Direxion has you covered with FAS (Daily Financial Bull 3X Shares ETF) and FAZ (Daily Financial Bear 3X Shares ETF). Take a look at how financials have done since the volatility started in early February.

Financial ETFs
Data Range: 2/1/2018 – 4/13/2018. 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. 

Technology Stocks Whip Around

After an incredibly smooth ride last year, technology and semiconductor stocks are encountering a lot of turbulence this year. The S&P 500 Information Technology Index is still up 3.5% this year, and the PHLX Semiconductor Index is still up 5%, but there have been bumps. Obviously, we can point to tariffs, the aftermath of the tax bill, and expensive stocks at highs in January. But the real bumps have been caused by the FAANG names. The NYSE Fang+ Index is still up almost 12% this year, but the recent peak-to-trough drop was almost 17%!

Facebook has faced its share of problems. The Cambridge Analytica scandal led to an overall data privacy issue. Google got tarred with the same scandal even without the direct problems Facebook saw. Amazon has been under attack all year from the president on tax avoidance and paying too little to the post office. Apple just seems to be in a cycle lull. Finally, Netflix looks amazing, up 60% this year.

Will earnings help this group out? It seems a little less clear with this group, as some of the issues with Facebook, Amazon, and Apple are more company-specific. As an overall group, technology names aren’t that expensive—at 17.6x estimated 2018 earnings—and semis are even cheaper at 14x estimated 2018 earnings. Remember: these are generally the innovators in the marketplace, and they often grow faster and are more expensive. The question with semis now shifts to whether we’re at a peak that plays out over the year. They often start to discount earnings woes well ahead of time.

So this sector has a lot going for it and against it—hence the volatility. TECL (Daily Technology Bull 3X Shares ETF) has you covered if you like these trends, and TECS (Daily Technology Bear 3X Shares ETF) is your tool if you’re concerned about the sector. Note semiconductors’ massive outperformance at some periods in the last couple of months below.

SPXL (3X Bull) vs. TECL (3X Bull) vs. SOXL (3X Bull)
Tech & Semiconductor ETF Performance
Data Range: 1/26/2018 – 4/13/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results.

Biotech Is a Trader’s Sector

Biotech stocks—with their binary outcomes and potential FDA approvals or denials—should whip around, pending various outcomes. But the Biotechnology sector is even more whippy than usual, down over 5% this year while falling 20% from peak to trough. Really, these are smaller stocks, more easily put in the “risk on” or “risk off” category, and they amplify market moves significantly. Earnings, again, are not much help here because investors want to hear about drugs’ success or failure. Plus, the stocks really will likely outperform in another risk-on period. The companies don’t have a lot of earnings, so the tax bill didn’t necessarily help either.

For biotech stocks to work on the long side, investors’ risk appetite would have to take off or a major approval could drive the stocks up. Take a look below at how much they outperformed and underperformed the S&P 500 over such a short timeframe. Whichever way you trade, look out for LABU (Daily S&P Biotech Bull 3X Shares ETF) or LABD (Daily S&P Biotech Bear 3X Shares ETF).  

SPXL (3X Bull) vs. LABU (3X Bull)
Biotech ETF Performance
Data Range: 1/26/2018 – 4/13/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results.

There’s Gold (miners) in Them-Thar ETFs

Gold and gold miners have been all over the place this year. Often, we think of gold as a safe haven and defensive play, and often it is. But sometimes it’s in its own cycle or just another asset for people to sell in times of trouble. This year, gold is playing its role as a safe haven and is up 3% during a flat and tumultuous market. But for some reason, the miners are acting more like other stocks—and, at some periods, even worse than the market. That behavior is relatively curious, especially given gold’s outperformance.

In this instance, we could see earnings benefit these names, as stronger gold prices should help them out. But maybe they’ll continue to act like small-cap stocks and stay down with the S&P 500. Either way, Direxion can keep you in (or out of) the gold miners trade with NUGT (Daily Gold Miners Index Bull 3X Shares ETF) or DUST (Daily Gold Miners Index Bull 3X Shares ETF). Take a look at DUST’s solid underperformance even while gold glittered.

SPXL (3X Bull) vs. NUGT (3X Bull)
Gold ETF Performance
Data Range: 1/26/2018 – 4/13/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. 

Conclusion: Keep Your Guard Up When Volatility is Up

Let’s hope we can get some solid earnings reports in April and May that give the market more solid footing. But there are a lot of worries in a lot of sectors—and even more on a macroeconomic level. The great news is that, even with the market whipping around, Direxion has the tools you need to stay nimble while trading boldly!

 

Related Leveraged ETFs:

 

 


Performance (as of 3/31/2018)

Ticker Fund Name   1 Mo % 3 Mo % YTD 1 Yr % 3 Yr % 5 Yr % S/I Inception Expense Ratio %
(Gross/Net)
FAZ Daily Financial Bear 3X Shares  NAV 5.25 -3.36 -3.36 -41.33 -38.84 -41.63 -58.88 11/06/08 1.15 / 1.1o
Market Price 5.04 -3.05 -3.05 -41.33 -38.83 -41.67 -58.88
SPXL Daily S&P 500 Bull 3X Shares  NAV -8.80 -6.50 -6.50 35.66 24.67 34.48 27.89 11/5/08  1.03 / 1.04
Market Close -8.71 -6.86 -6.86 35.79 24.72 34.63 27.88
FAS Daily Financial Bull 3X Shares  NAV -8.20 -5.74 -5.74 44.75 28.22 36.04 4.85 11/6/08  1.01 / 1.02
Market Close -7.92 -5.80 -5.80 45.24 28.27 36.18 4.88
TECL Daily Technology Bull 3X Shares  NAV -12.68 2.22 2.22 71.23 48.87 52.51 48.09 12/17/08  1.09 / 1.09
Market Close -12.78 1.99 1.99 71.04 48.79 52.49 48.12
SOXL Daily Semiconductor Bull 3X Shares  NAV -9.58 10.92 10.92 95.36 67.61 75.06 41.08 3/11/10  1.00 / 1.02
Market Close -9.53 10.82 10.82 95.29 67.56 75.16 41.08
LABU  Daily S&P Biotech Bull 3X Shares  NAV -10.24 2.32 2.32 66.55 -21.75 5/28/15  1.08 / 1.08
Market Close -10.53 2.00 2.00 66.72 -21.76
NUGT Daily Gold Miners Index Bull 3X Shares  NAV 8.51 -22.92 -22.92 -32.15 -31.23 -59.49 -58.54 12/8/10  1.20 / 1.20
Market Close 7.53 -22.83 -22.83 -31.97 -31.27 -59.51 -58.53
 

* 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 0.95%. The Funds’ adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with each Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse each Fund for Other Expenses through September 1, 2019, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap financing 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.

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. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

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. The Direxion Shares ETFs are not designed to track their respective underlying indices over a period of time longer than one day.