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Which ETFs Are Ideal for Contrarian Investors Anticipating a Summer Fade?

Wall Street surged ahead in June. The S&P 500 Index registered its best return for the month since 1955 – adding 6.9% – while its industrials counterpart, the Dow Jones Industrial Average (DJIA), logged a 7.2% gain to record its most impressive June since 1938.

Last month's stellar performance even prompted U.S. President Donald Trump to take some credit for the buoyant stock market. "Stock Market is heading for one of the best months (June) in the history of our Country. Thank you Mr. President!," he tweeted.

Interestingly, June was the worst performing month in the first half for the S&P 500 between 1950 and 2017, falling 0.06% on average, according to the Stock Trader's Almanac. July, on the other hand, was one the index's better months of the year over the period, rising an average of 1%. This then begs the question: because June was such an outlier month for the market this year, will July also buck the long-term statistics and get a case of the summer blues?

From a technical perspective, the charts of the three index inverse exchange-traded funds (ETFs) discussed below – which move in the opposite direction to the market – somewhat support this contrarian thesis. They each sit near significant support levels, with key indicators flashing severely oversold conditions that could forewarn a bout of selling this month. Let's look at the specifics of each fund and discuss several trading plays.

Direxion Daily S&P 500 Bear 3X Shares ETF (SPXS)

Formed at the height of the 2008 financial crisis, the Direxion Daily S&P 500 Bear 3X Shares ETF (SPXS) seeks to offer three times the inverse daily performance of the S&P 500 Index. The $427.82 million fund uses a mix of swap agreements, futures contracts, and short positions to provide its leveraged exposure. SPXS suits short-term traders with its narrow 0.05% spread and daily turnover of more than 7.5 million shares. Its 1.08% management fee sits just above the 0.94% category average but remains competitive for a geared fund. The ETF rebalances daily, which makes returns greater than one day subject to the effects of compounding. As of July 5, 2019, SPXS issues a 1.56% dividend yield and has fallen 21% over the past month as the market has rallied.

The ETF's shares have formed a broad falling wedge pattern over the past nine months to establish important support and resistance zones. More recently, the price has declined toward the pattern's lower trendline, providing a high-probability entry point for traders. Consider waiting for a price reversal, such as a bullish engulfing pattern, before committing capital. Those who take a position should look to take profits near the wedge pattern's upper trendline at $20.50. Manage risk by setting a stop-loss order just below the entry candlestick and moving it to breakeven if price rises above the 50-day simple moving average (SMA).

ProShares Short Dow30 ETF (DOG)

With net assets of $220.35 million, the ProShares Short Dow30 ETF (DOG) aims to return investment results corresponding to the inverse daily performance of the DJIA – an index that tracks 30 large, publicly owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ. The fund's razor-thin average spread of 0.02% and dollar volume liquidity of $32 million make it a suitable instrument for those looking to catch intraday moves or a sell-off over several days in stocks such as The Boeing Company (BA), Microsoft Corporation (MSFT), and The Coca-Cola Company (KO). DOG offers a 1.44% dividend yield and has lived up to its ticker symbol performance-wise, returning -7.18% over the past month as of July 5, 2019.

Like SPXS, DOG shares have oscillated within a falling wedge that marks out suitable buying and selling areas on the chart. Those wanting to buy the fund should look for an entry point close to the pattern's lower trendline that provides crucial support at $52. Chances of an upside reversal significantly increase at this level given that the relative strength index (RSI) sits just above the oversold threshold at 30. Traders should place a take-profit order near $56, where the price is likely to encounter resistance from the falling wedge pattern's top trendline as well as from the 200-day SMA. Position a stop within a point of the entry price to limit losses.

ProShares Short QQQ ETF (PSQ)

Created in the mid-2000s, the ProShares Short QQQ ETF (PSQ) intends to deliver similar returns to the inverse daily performance of the NASDAQ 100 Index – a non-financial benchmark index that includes companies from various industries including technology, biotechnology, retail, industrial, and health care, among others. The ETF keeps trading costs down with more than 2 million shares traded daily and an average spread of just 0.03%. Its 0.95% expense ratio isn't exactly low but shouldn't overly affect short-term stays. As of July 5, 2019, PSQ yields 1.57% and has dropped 8.60% over the past month.

The PSQ share price rallied up to the 200-day SMA in May amid the broad market sell-off. However, since then, the fund has tumbled toward its late-April low that now acts as a crucial area of support at the $27.50 level. Traders who buy here should anticipate a move back to the early-June swing high at $31.17. It may be prudent to wait for an intraday reversal to avoid catching a falling knife and confirm shifting sentiment. Steer clear of the setup if the fund's price closes more than a dollar beneath the previous YTD low at $27.58.

In summary, while the summer months have traditionally seen a more positive trend in the stock market, the recent exceptional performance in June begs for a contrarian perspective. The three inverse index ETFs discussed here provide an opportunity for traders to position themselves for a potential summer fade. It's crucial to conduct thorough research, consider risk management, and closely monitor market conditions before implementing any trading strategy. Contrarian investing can be rewarding, but it also comes with its share of risks, so cautious and informed decision-making is essential.

Tickeron's Offerings

The fundamental premise of technical analysis lies in identifying recurring price patterns and trends, which can then be used to forecast the course of upcoming market trends. Our journey commenced with the development of AI-based Engines, such as the Pattern Search EngineReal-Time Patterns, and the Trend Prediction Engine, which empower us to conduct a comprehensive analysis of market trends. We have delved into nearly all established methodologies, including price patterns, trend indicators, oscillators, and many more, by leveraging neural networks and deep historical backtests. As a consequence, we've been able to accumulate a suite of trading algorithms that collaboratively allow our AI Robots to effectively pinpoint pivotal moments of shifts in market trends.

 Disclaimers and Limitations

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