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Betting on Volatility

May 17, 2022

Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.

Stocks continue to trade in a volatile manner, with up and down movements in major indexes of two, three or four percent in either direction on a daily basis. Between multi-decade high inflation and fears of an economic recession, stocks are facing mounting headwinds with respect to their trend.  The good news is that overall earnings reports have been solid thus far, but will this be enough to reignite the market’s bull trend?

Playing High-Beta during High Volatility

So called high-beta stocks are those which exhibit greater volatility than the broad markets. During market routs, there is a tendency for certain stocks to lead the market lower.  High-beta stocks fall into this category – but there is a catch to this. They also tend to lead to the upside as well.  In other words, they’re simply stocks that are more volatile than the rest of the market – they outperform to the upside and to the downside.  In many cases, these were the very stocks that outperformed to the upside during previous rallies.  This space presents a potential opportunity for speculative-minded individuals to capitalize on the market’s wide price swings.   For those looking to position according to more market volatility, Direxion’s Daily S&P 500 High Beta Bear 3x Shares (Ticker: HIBS) fund offers traders 300% downside exposure to the S&P 500’s High Beta Index for any given single day.  The High Beta Index tracks the 100 highest beta* stocks within the S&P 500.

Below is a daily chart of HIBS as of May 12, 2022:

TradingView.com, May 12, 2022. Candlestick charts display the high, low (stick), open, and closing prices (body) of a security for a specific period.

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 the most recent month-end performance go to Direxion.com. For standardized performance click here.

Reversion Can Mean Opportunity

Equity prices move in cycles – they are not linear. Stocks are showing signs of being oversold after being down for 6 weeks in a row, which is the longest consecutive weekly decline since 2011.  This could lead to a technical bounce, and in many cases, stocks that were down the most, or the ones that were heavily-shorted during the decline, tend to experience sharp, short-covering rallies.  For traders looking to position themselves based off a mean-reversion rally in the high-beta sector, Direxion offers the Daily S&P 500 High Beta Bull 3x Shares (Ticker: HIBL) fund, which tracks 300% of daily upside exposure to the S&P 500’s High Beta Index. 

Below is a daily chart of HIBL as of May 12, 2022:

TradingView.com, May 12, 2022. Candlestick charts display the high, low (stick), open, and closing prices (body) of a security for a specific period.

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 the most recent month-end performance go to Direxion.com. For standardized performance click here.

The Pace of Rate Hikes and Surprise Catalysts

For the time being, the Fed remains set on proceeding forward with monetary tightening.  Their intent is to lower inflation, but this is also decreasing market liquidity levels, and leading to wide gyrations in equity prices.  Even so, they’ve been very clear in their plans to tighten, and have abandoned the “transitory inflation” narrative.  This could also mean that the rate hikes are already priced into the market.  A catalyst for an equity bounce could be a change in the pace of the rate hikes, and could provide bulls some relief in the short-term. For traders looking for broader, leveraged long and short exposure to equities, Direxion offers the Daily S&P 500 Bull 3x Shares (Ticker: SPXL) fund and the Daily S&P 500 Bear 3x Shares (Ticker: SPXS) fund, which seek to track 300% of the daily upside and downside of the S&P 500 index.

*Beta describes how the expected return of a stock or portfolio is correlated to the return of the financial market as a whole. A Beta greater than 1.00 indicates the portfolio is more volatile than the market, and a beta less than 1.00 indicates the portfolio is less volatile than the market.

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and include risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geography which can increase 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. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Market Disruption Risk, Aggressive Investment Techniques Risk, Counterparty Risk, Intra-Day Investment Risk, and risks specific to high beta investing. Beta investing entails investing in securities that are more sensitive to changes in the market, and thus are more volatile based on historical market index data. Additional risks include, for the Direxion Daily S&P 500® High Beta Bull 3X Shares, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk, and for the Direxion Daily S&P 500® High Beta Bear 3X Shares, risks related to Shorting and Cash Transactions, and Daily Inverse Index Correlation/Tracking Risk. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Distributor: Foreside Fund Services, LLC.