foxex: Summer’s End

Chart Advisor | Focus on the Price

Friday, September 18, 2020 Headlines

1. Interest rates rise and stocks fall while bonds and the dollar hold
2. Discretionary sector stocks selling off
3. Are inverse ETFs a good idea?

Market Moves

Stocks have now ended the week lower than they started for the third consecutive occasion. Most analysts would like to attribute this to uncertainty from the Fed announcement which points to low interest rates. However, the U.S. Treasury 10-year note index (TNX) rose today, putting it near short-term resistance, implying that investors either don't believe, or don't care, about the Fed's stated policies for now.

Bond prices did not fall in proportion to the amount interest rates climbed, and the greenback seemed to hang on to its value well enough also—thus making the case that the markets don't feel the need to keep interest rates low, even though the Fed says that's what they want to do. Usually such signals are a sign of a healthy market because it means investors are doing what they want to do, and not merely chasing after a Fed-generated incentive.

If the market is healthy, and what investors within it want to do is sell stocks, then traders should take note and consider protecting their short-term positions. It could be that the downtrends for the major indexes may last a few weeks longer. Of course, the good news is that when the selling is done, there will be several stocks that represent good opportunities, but there is no telling from this vantage point how long that will be.

Discretionary Sector Stocks Selling Off

It's not just the tech stocks that are selling lower. Nothing says summer is over like RV companies losing value in their share prices. The chart below compares State Street's Consumer Discretionary Sector index ETF (XLY) with three stocks that are typical holdings in that index: Home Depot (HD), Winnebago (WGO) and Harley-Davidson (HOG). All three of these stocks are closing out lower. This adds to the downward trend on their charts. XLY seems to have completed a head-and-shoulders reversal pattern while coincidentally completing a bearish engulfing candle pattern as well. Both suggest that the sector is positioned to go lower.

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Are Inverse ETFs a Good Idea?

If stocks are likely to trend lower for a little while, it might be worthwhile for traders to consider the opportunities represented by one of the inverse ETFs. The chart below compares the current price action on ProShares' UltraPro Short QQQ ETF (SQQQ), Direxion's Daily S&P 500 Bear 3X Shares ETF (SPXS), and Direxion's Daily Small Cap Bear 3X Shares ETF (TZA). These ETFs rebalance daily based on the end-of-day performance of the indexes they benchmark, so they don't make for good long-term hedging instruments. They do, however, make excellent trading vehicles for short-term and active traders looking to profit from downside moves.

The Bottom Line

Stocks fell today making the third week in a row the indexes have closed lower. The consumer discretionary sector shows notable weakness as well as some stocks within it. The inverse ETFs actually look attractive right now for traders looking to profit on the downward side.

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