Traders Bail On This Leveraged ETF As Earnings Roll In

The S&P 500 is up 10 percent this year and with the benefit of 1.4 percent gain over the past week, the benchmark U.S. equity index continues pushing to record highs.

Sounds like a recipe for trouble for traders that have been long inverse or, worse yet, inverse leveraged exchange traded funds that profit from declines in U.S. stocks.

Rising U.S. stocks are chasing traders from bearish products such as the ProShares UltraShort S&P500 SDS. SDS, one of the largest inverse ETFs trading in the U.S., attempts to deliver double the daily inverse performance of the S&P 500. So if the S&P 500 falls by 1 percent on a given day, SDS should rise by 2 percent.

“We have seen some substantial redemption flows lately in a levered Bear fund that we have profiled here from time to time known as SDDs, where over $1 billion has left the fund,” said Street One Financial Vice President Paul Weisbruch in a note out Tuesday. “This move comes as the SPX itself has been trading if not threatening new all-time highs lately. “SPX reached 2463.54 reached on an intraday basis last Friday before some regression back to present levels in stocks. This could be profit-taking in the fund, and someone expressing a view that perhaps being short here has little upside going into core earnings season.”

Where Money Is Flowing

With the Nasdaq Composite continue to ascend to record highs, it stands to reason that investors would be attracted to the related ETFs. As Weisbruch points out, the PowerShares QQQ Trust, Series 1 (ETF) QQQ has recently been hauling in new money in a big way.

To be precise, QQQ, which tracks the Nasdaq-100 Index, has added more than $3.3 billion in new assets over just the past week, according to issuer data.

With QQQ ringing up new highs, active traders have been putting new money to work with the ProShares Ultra QQQ (ETF) QLD. QLD is designed to deliver double the daily returns of the Nasdaq-100 Index.

Earnings Impact

QQQ has been boosted by big-name earnings reports, such as Monday's report from Netflix, Inc. NFLX, but the ETF allocates about 80 percent of its combined weight to the technology and consumer discretionary stocks, so as more marquee names from those sectors step into the earnings confessional, QQQ could rise some more.

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