Skeptical Contrarians May Find Opportunity In Direxion's S&P 500 Bear Fund

It would seem that optimists currently see no reason to abandon their bullishness, with the benchmark S&P 500 index again inking another record close. What's more, the available data appears to justify an acquisitive posture. For example, job openings rose by 372,000 to 7.744 million in October, up from a revised reading of 7.372 million in the prior month. The latest figure also beat analysts' consensus view of 7.48 million.

So far this year, the venerable index has printed 54 all-time highs. In addition to labor market dynamics, the jump in the S&P 500 can be attributed to Federal Reserve rate cuts, excitement over artificial intelligence and President-elect Donald Trump's pro-market policies. Nevertheless, analysts at Ned Davis Research sounded the alarm: the stunning rally may represent too much of a good thing.

"Historical data since 1928 shows that in years when the S&P 500 hit more than 35 record highs, the median gain for the index the following year was a mere 5.8%, falling short of the long-term average of 8%," wrote Benzinga's Navdeep Yadav when covering the news. "In years with at least 50 record highs, the median return was -6% the following year."

Naturally, the concern is that "stocks do not go up forever," analysts quoted in the article remarked, adding that "Perhaps AI will drive another productivity and profit boom that will keep inflation and Fed policy benign. History suggests that is the exception rather than the rule."

To be fair, some notable exceptions exist, such as in 1996, when the benchmark index returned 20% despite inking 77 record highs the previous year. Still, the quoted strategists are quick to point out that these gains stemmed from the dot-com era's productivity spike.

Another warning to consider is the technical framework. While it's easy to celebrate the bull market, the bulk of the equity arena's returns hailed from only a handful of enterprises. "Continued narrowing would set the stock market up for a tougher 2025," the analysts warned.

The Direxion ETF: Investors who have similarly grown skeptical of the market's seemingly relentless march higher can exercise their contrarianism with the Direxion Daily S&P 500 Bear 1X Shares SPDN. As the financial services provider states on its website, the SPDN is an exchange-traded fund that seeks 100% of the inverse (or opposite) performance of the namesake index.

A key advantage of the S&P 500 bear fund is convenience. SPDN can be acquired in a similar vein to picking up a security. Therefore, investors don't need to participate in the options market, which may add a layer of complexity. However, it's important that traders do not hold their position for longer than one day. Otherwise, the effect of leverage compounding in an inverse fund can lead to value erosion.

The SPDN Chart: To no surprise, the SPDN ETF has been a poor performer this year, losing over 19% of its value since the beginning of January. Still, a possible turnaround has the potential to lead to significant upside.

• Currently, the inverse fund is struggling against a decisively declining trend channel, punctuated with a price action below key moving averages.
• At the same time, while the S&P 500 index has climbed higher, the law of large numbers may be stymieing its progress.
• Ideally, SPDN bulls (or market bears) will be looking for a baseline at or above the $10.50 mark, which may signal a sentiment reversal.

Featured photo by Angela on Pixabay.