All eyes are on Apple's (AAPL) earnings report tonight. There is growing chatter that AAPL, and tech's performance as a whole could dictate the entire direction of the market for the next few months. Google (GOOG) reported an earnings beat, and investors have responded favorably. Thus far, about 16% of companies in the S&P 500 have reported earnings, and in my opinion have been slightly better than expected overall, considering the economy is still weak. However, with the S&P 500 near 5 years' highs, there is a lot more risk to the downside, in my opinion. We have not seen a market correction in sometime. With all eyes on AAPL tonight, if we see some real bad news out of the company and from the remaining companies this earnings season, investors may want to consider taking some bearish action should market panic ensue. The media will be all over the report, so after hours expect the stock to move. The numbers to look for are of course the top and bottom lines, which consensus estimates are for $54.69 billion in revenue and earnings per share of $13.42. Other items to watch are the margins, which AAPL has guided to be 38% gross margin, 28.4% for operating margin and 21.5% for net profit margin. Naturally, analysts are more bullish, so beating these guided figures is paramount. Finally, look for unit sales of iPhones, iPads, Macs and iPods.
A beat on all the numbers could spark the stock to take off once again, whereas a big miss could rattle the whole market. Should the market begin to teeter on a bad report, there are several bearish actions investors can take. The actions that can be taken vary in risk, thus one must consider their tolerance for said risk. The conservative investor will have little choice but to sell equities and sit in cash or risk holding positions and waiting weeks, months or possibly even years for the rebound. This is only wise with a diversified, high-yield portfolio and even then portfolio growth will be missed by sitting idle. Investors willing to take on more risk can buy puts, sell calls or straight out short stocks. For those who cannot or will not take this approach, there are bear funds that exist, both leveraged and unleveraged, which can protect capital in bear markets. In order of risk based on degree of leverage and underlying indices replicated, I highlight three bearish ETFs that will provide outsized returns should the market plunge.
ProShares Short S&P 500 (SH): This ETF seeks daily investment results that correspond to the inverse of the daily performance of the S&P 500 index. As most investors know, the S&P 500 index is a measure of large-cap United States stock performance. It is a capitalization weighted index of 500 United States operating companies and selected real estate investment trusts. SH attempts to invest at least 80% of its net assets, including any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are inverse to those of the index. It intends to invest assets not invested in financial instruments, in debt instruments and/or money market instruments. The fund intends to concentrate its investments in a particular industry or group of industries to approximately the same extent the underlying index is concentrated.
SH is a low risk way to take a bearish position. It should be noted that because there is an expense fee associated with the ETF (like most ETFs) and that it seeks daily results, the investment could lose value over time in a stagnant market. The SH has an expense ratio of 0.89% annually, meaning $89 on a $10,000 investment goes to fees annually. SH currently trades at $32.45 on approximately 3.3 million shares exchanging hands daily. SH is down 1.3% in the last week, while the S&P 500, as measured by the most popular ETF that tracks the index, the SPDR S&P 500 Trust (SPY) is up by 1.4%. SH has a 52-week range of $32.40-$39.37.
ProShares UltraShort S&P 500 (SDS): For those with slightly more risk appetite seeking to make a leverage bet to the downside, SDS could be a profitable play. This leveraged fund seeks daily investment results that correspond to twice the inverse of the daily performance of the S&P 500. SDS invests in common stock issued by public companies. SDS also invests in derivatives, which are financial instruments whose value is derived from the value of an underlying asset, interest rate or index. SDS recently underwent a one-for-four reverse split to bolster the share price as the nearly four-year bull market took its toll on this fund's value. The value of shares not only depreciated from being sold down with other bearish plays during the bull market, but was also hurt by its expense ratio (0.89%) and the fact that it is adjusted daily. Funds that seek daily performance never track the long-term performance of an underlying index due to a concept known as "slippage." More on that can be found here. Despite this fact, daily leveraged funds such as the SDS, in periods of panic and bearishness, perform exceptionally well. Thus, a well-timed position can be very profitable. SDS currently trades at $49.28 a share. SDS has average daily volume of 8.9 million shares exchanging hands. In the last week, SDS is down 2.8%, while the SPY is up 1.4%. SDS has a 52-week range of $49.14-$73.04.
Direxion Daily S&P 500 Bear 3x ETF (SPXS): For those with the highest appetite for risk, besides investors who are willing to short stocks, the SPXS can be considered for heavily leveraged bearish exposure. SPXS, formerly the Direxion Daily Large Cap Bear 3X fund, seeks daily investment results before fees and expenses of 300% of the inverse of the price performance of the S&P 500 Index. As with other funds, there is no guarantee the fund will meet its stated investment objective and is subject to slippage as described above. The fund also has a higher 1.14% annual expense ratio.
Under normal circumstances, SPXS management creates short positions by investing at least 80% of its net assets in: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the S&P 500. Given this approach, in times of market selloffs, the SPXS will deliver outsized returns. Thus, this fund should be considered by those who seek to profit from panic that could result from a terrible earnings report from AAPL that jolts the market.
SPXS currently trades at $14.63 a share. SPXS has average daily volume of 2.0 million shares exchanging hands. In the last week, SPXS is down 4.1%, while the SPDR S&P 500 Trust (SPY) is up 1.4%. SPXS has a 52-week trading range of $14.63-$28.63.
Many approaches exist to position accordingly for market panic that could result from a bad earnings season. While we have had a great bull run in the last few months and the last few years as a whole, earnings will likely dictate the direction of equities markets. If AAPL really misses the mark and other companies deliver lackluster earnings , the aforementioned bearish funds will perform very well in response to the market panic that will ensue. A lot of positive sentiment on equities has been baked in to the markets, thus disappointments in earnings could lead to a quick drop across the board in equities.