When stock market indexes experience sharp drawdowns, it can hit traders swiftly and unexpectedly. That said, market navigators can prepare themselves and potentially profit using inverse ETFs; two ETFs in particular from Direxion Investments.
The most recent dip in the market served as a reminder that market volatility is always omnipresent despite how relatively calm stock market indexes may be. The CBOE Volatility Index closed in on 20% mid-April before subsequently falling at the start of May. This allowed the market to resume its rally.
However, some market experts are forecasting this could be the proverbial calm before the storm. According to a MarketWatch report, analysts at Stifel a substantial drawdown could be on the horizon. With regard to numbers, this means a 10% correction in the S&P 500 from its current levels.
Contributing to that decline is the continuous thorn in the side of bullish market purveyors, which is inflation. The higher-for-longer inflation narrative could reach even higher heights and eventually spin the S&P into a downward spiral that could dent a sizeable portion of the year’s gains. Thus far, the index is up almost 12%.
“We have been wary of a broad S&P 500 correction in the middle quarters of 2024,” analysts said. “While most strategists were expecting a recession last year or eagerly attempting to call the start of one in the next year. We have been of the view that the ~5 quarters 1Q22 to 2Q23 were a ‘pseudo-recession.’ And the Fed has already harvested all the normal post-recession disinflation we would expect.”
Stifel analysts noted that inflation remains above the 2% number the Fed is targeting. However, prices have risen for a third straight month. Despite the slower job growth in April, the labor market is still relatively strong.
“As a result, the sustained 2% Core PCE inflation the Feed seeks is a pipe dream. With rates normalized and the mid-2024 pop in Core PCE to just over 3% that our models indicate we expect Fed rate cuts to be pushed back further, causing a middle quarters correction for equities,” strategists added.
2 Tools in the Event of a Drawdown
A drawdown opens the opportunities for traders to use inverse ETFs to profit from bearish pressure. With tech comprising a sizeable portion of the S&P 500 index, they can consider the Direxion Daily Technology Bear 3X ETF (TECS ), which seeks daily investment results equal to 300% of the inverse (or opposite) of the daily performance of the Technology Select Sector Index, which is provided by S&P Dow Jones Indices and includes domestic companies from the technology sector.
Of course, the obvious play would be to use the Direxion Daily S&P 500 Bear 3X ETF (SPXS ). The fund seeks daily investment results equal to 300% of the inverse of the daily performance of the S&P 500 Index.
Both funds are just tools traders can use to stay agile in the markets despite what major indexes do. And flexibility in today’s market is almost imperative.
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