Listen To What Leveraged S&P 500 ETFs Are Saying

The S&P 500 is up just 1.35 percent this year. However, things have been much worse for bearish leveraged exchange-traded funds tracking the benchmark U.S. equity index.

One such fund is heading for a reverse split while the Direxion Daily Large Cap Bear 3X Shares SPXS is down nearly 13 percent year-to-date. Obviously, that performance is nothing to be excited about, but risk-tolerant traders should not be dismissive of what SPXS is currently saying.

Where Are We In The Market Cycle?

“U.S. stocks are bumping up against all-time highs again this year. After peaking over 2100 in early June, the S&P 500 has ebbed. Sector performances offers a glimpse of where we are in the market cycle,” said Direxion in a recent note.

Related Link: A New Way To Be Bearish On Junk Bonds

“The top performing sectors over the past 12 months have been telecommunications, consumer staples and utilities. While energy, materials and financials have brought up the rear, even through their most recent rally. What’s striking is that these performances fall in line with what you might expect to see during an economic contraction, with defensive sectors leading the market. Some think this may be a sign that the market is already preparing for recession.”

If You're Bullish...

Remembering that traders are often bullishly biased and that when it comes to leveraged ETFs, bullish funds usually do better from an asset-gathering standpoint, it is notable what is going on SPXS and its bullish counterpart, the Direxion Large Cap Bull 3X Shares (ETF) SPXL.

“Asset flows by market participants in leveraged and inverse ETFs seem to indicate the growing sentiment that markets have peaked. For example, over the past 12 months, assets have been flowing from the bull side of the trade to the bear side in the case of SPXL and SPXS,” said Direxion, the second-largest issuer of inverse and leveraged ETFs.

Another Option

Since mid-January, SPXL has seen its shares outstanding tally fall by 5.1 million while the number of shares outstanding in SPXS, the bearish leveraged S&P 500 offering, have swelled by 22.7 million, according to Direxion data.

Traders looking to put on bearish S&P 500 trades without the leverage have a new tool in the form of the Direxion Daily S&P 500 Bear 1X Shares SPDN, an inverse though not leveraged play on the S&P 500.

So if SPDN behaves intended, on days when the S&P 500 falls 1 percent, the new Direxion ETF should rise by that amount. SPDN debuted last week.