Wild price swings in the major market indexes this month caused by uncertainty surrounding the coronavirus outbreak don’t look like they will be abating anytime soon. In the past week alone, the broad-based S&P 500 has rallied 20% from its Monday low.
With stocks falling as much as 35% since late February, it’s not surprising to see a short-term oversold bounce – but can these gains be sustained? To help answer that question, let’s look at what happened after comparable sell-offs over a similar period in 1987 and 2008. Both of these market downturns saw falls in the neighborhood of 35% before posting speedy rallies of 25% and 19%, respectively. However, stocks retested their October low several times in 1987, while in 2008, the bounce gave way to even lower lows until a bottom formed in March of the following year.
Those who expect history to repeat itself and see the market retest this month’s low should look at these three index inverse exchange-traded funds (ETFs) that move in the opposite direction to the index they track. Below, we outline the details of each fund and explore several tactical trading plays.
ProShares Short S&P500 (SH)
Formed in 2006, the ProShares Short S&P500 (SH) seeks to deliver investment results that correspond to the inverse daily performance of the S&P 500 Index. The underlying benchmark comprises some of the largest companies in the world, including Microsoft Corporation (MSFT), Bank of America Corporation (BAC), and Exxon Mobil Corporation (XOM), making the fund ideal for those who want to bet against these type of bellwether names. Meanwhile, a tight spread and daily volume of over 18 million allow traders to exploit small intraday moves. As of March 27, 2020, SH controls assets under management (AUM) of $2.11 billion, offers a 1.62% dividend yieldand has jumped 21.36% on the year.
The ETF’s share price staged a $10 impulsive move between late February and mid-March as coronavirus-driven selling began to take hold. More recently, the fund has retraced to the $28 area, where price finds a confluence of support from a multi-year horizontal line and the 50% Fibonacci retracement level. Those who buy here should place a stop-loss order under the 61.8% Fibonacci retracement level and look for a retest of this month’s high at $33.16.
ProShares UltraPro Short Dow30 (SDOW)
With net assets of $299.45 million, the ProShares UltraPro Short Dow30 (SDOW) aims to return three times the inverse daily performance of the Dow Jones Industrial Average Index. The decade-old fund suits traders who want to take a highly leveraged bet against 30 publicly owned blue-chip industrial companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. Narrow penny spreads combined with an average turnover of nearly 5 million shares per day make the fund a popular choice in the segment. SDOW yields 1.60% and has gained nearly 50% since the start of the year as of March 27, 2020.
Although SDOW shares have fallen more than 50% from their March 23 high, they now find a significant floor of support at $45 from the last year’s July and September swing lows and 200-day simple moving average (SMA). The 200-day SMA has also recently crossed above the 50-day SMA to form a “golden cross” – a bullish technical signal that suggests further upside. Traders who enter at current levels should set a take-profit order near key resistance at $95 while managing risk with a stop situated beneath the March low at $41.26.
ProShares Short QQQ (PSQ)
Created in 2006, the ProShares Short QQQ (PSQ) has an objective to return the inverse daily return of the NASDAQ 100 Index. The ETF, which holds an asset pool of $659.06 million, allows swing traders effectively to gain short exposure to non-financial sectors, including technologybiotechnology, and retail, among others. More than 8 million shares exchange hands per day on a razor-thin 0.04% spread to ensure sufficient liquidity and low trading costs. As of March 27, 2020, the ETF charges a 0.95% management fee, yields 1.71%, and is up nearly 9% year to date (YTD).
Traders should watch for buyers to defend the $25 level, where the fund encounters support from a 15-month downtrend line and the 61.8 Fibonacci retracement level as measured from Feb. 19 low to the March 23 high. Those who decide to take a trade should consider setting a profit target near horizontal line resistance at $29 and cutting losses on a close below the Feb. 24 breakaway gap at $23.23.