Astounding Volume in 3x Financial ETF FAS May Signal Turnaround

Yesterday, the Dimension 3X Financial Bull ETF (NYSE:FAS) traded nearly 300M shares. That’s pretty amazing for an instrument that didn’t even exist a year ago. Forgive the style drift — I know it's hardly a microcap. Though net assets are down to $320M (per Yahoo!), the ETF attempts to replicate on a leveraged basis the daily movements of much bigger stocks.

That said, I don’t think this market will turn until the FAS — which Ron Sen aptly named the crack cocaine of financial stocks — heads north. I’m a buyer here and believe that a short-term reprieve will come this week or next.

This is just an attempt to get in front of a snapback rally, not an endorsement of lasting recovery at our nation’s ailing banks. There are three potential catalysts:

1. the severity of the oversold condition;

2. this Thursday’s hearing on mark-to-markets, the lifting of which many think will aid bank stocks; and

3. options expiration.

The first catalyst (the oversold condition) is most compelling. When a stock trades at such massive volume and can’t go down even in the face of negative prints on the major indices, there is a pretty good chance the sellers are ready for a break. That’s my bet anyways, and we’ll find out as the week progresses whether it works.

Click to enlarge

DISCLOSURE: Long FAS

Comments

[mr freddo:]

Thanks for the interesting tip. I will track FAS for the next couple of weeks. A snap back rally seems reasonable but I believe that if the market bounces up, there will be plenty of sellers along the way who will take advantage of any rally to get out of this market and get into something safe like....what?

Mar 10 03:21 AM

[MiddleOfRoader:]

FAS is for you if you like to go all in when you play poker.

Mar 10 03:34 AM

[Mr. Ed, Jr.:]

There is some "buzz" about possible repeal or suspension of mark-to-market. Quite a few investors believe that would create a good rally for the financials.

Investor/gamblers are taking a flyer in the 3x, hoping for a quick score and cashout.

Since repeal of mark-to-market would just be an accounting trick, I would expect any such rally to be short-lived.

Mar 10 03:44 AM

[Conan the B...:]

Elimination of Mark to Market would quarantine the Toxic assets behind a notional wall.

If you exclude All of the Toxic assets?

Poof, the Banking system is solvent. They can hold them forever waiting for improvement, Just like the Fed and Treasury are doing on our behalf....the public will make a profit eventually.

just an opinion.

Mar 10 11:05 AM

[TBill:]

And now we know. INsiders on the Citi anouncement.

Mar 10 11:44 AM

[Mad Hedge F...:]

This had to come. Looks like there is a massive short covering play setting up in the financial sector. There was big hedge fund buying of calls and call spreads in the Financials Select Sector SPDR ETF (XLF) at the end of last week. The healthy components of this basket, like JP Morgan (JPM) (12%), Goldman Sachs (GS) (7%), and Wells Fargo (WFC) (6%), are at record low valuations. The sick ones like Citigroup (C) and Bank of America (BAC) are essentially at zero. This makes your downside risk very low. Watch this space.

Mar 10 12:32 PM

[OptionSmash:]

I've been hooked on this thing for awhile, but wouldn't a price/volume comparison be a little bit more accurate way to judge the overall volume? It's easy to see the volume will be higher because a given amount of dollars buys more shares.

Mar 10 02:58 PM

[Vox Rationalis:]

Pretty sweet timing.

Mar 10 03:32 PM

[Whitehawk:]

What worries me about this and other 2x, 3x long vehicles is that they have been driven down dramatically since they first traded last year, and many now trade in the low single digits. On the upside they don't appear to increase 2x, 3x the underlying sector moves. I've been disappointed with DXO for this reason and think FAS may in fact show similar behavior. We are at a disadvantage without years of data and behavior, of course.

Anyone care to comment on this?

Mar 10 05:59 PM

[momomiester:]

FAS isnt' nearly as risky as it was at 10 being many of these financials are blown up. But if we get as sustained rally they can hit up to 9 easy. They key was to buy yesterday in the 2's being the market stopped there.

Mar 10 09:10 PM

[thotdoc:]

Yes,
These are day trading instruments. Please read the prospectus and it will become more clear how to use them.

I typically buy in the last 1/2 of the day to get un up or down pop.

Good luck,

G


On Mar 10 05:59 PM Whitehawk wrote:

> What worries me about this and other 2x, 3x long vehicles is that
> they have been driven down dramatically since they first traded last
> year, and many now trade in the low single digits. On the upside
> they don't appear to increase 2x, 3x the underlying sector moves.
> I've been disappointed with DXO for this reason and think FAS may
> in fact show similar behavior. We are at a disadvantage without years
> of data and behavior, of course.
>
> Anyone care to comment on this?

Mar 11 12:38 AM

[monday1929:]

You nailed it.


On Mar 10 03:44 AM Mr. Ed, Jr. wrote:

> There is some "buzz" about possible repeal or suspension of mark-to-market.
> Quite a few investors believe that would create a good rally for
> the financials.
>
> Investor/gamblers are taking a flyer in the 3x, hoping for a quick
> score and cashout.
>
> Since repeal of mark-to-market would just be an accounting trick,
> I would expect any such rally to be short-lived.

Mar 11 07:47 AM

[Whitehawk:]

I agree they are day trading instruments. But it is apparent they are not 2x or 3x their claimed underlying index on an time frame, short or long term. If you or anyone else has data showing otherwise, I'd like to see it. The prospectus just absolves the fund company of lawsuits.


On Mar 11 12:38 AM thotdoc wrote:

> Yes,
> These are day trading instruments. Please read the prospectus and
> it will become more clear how to use them.
>
> I typically buy in the last 1/2 of the day to get un up or down pop.
>
>
> Good luck,
>
> G

Mar 12 05:10 PM

[Minlita:]

I like also to trade the FAZ (Direxion Financial Bear 3x Shares) that traks the daily performance of the 1000 Financial Services Index.
etfguide.com/advance_s...

Currently FAZ and the FAS are oversold, that means the market is ready for short the financials again.
FAZ chat: stockcharts.com/h-sc/u...
FAS Chart: stockcharts.com/h-sc/u...

Financials EFT
I belive we are going to see a low open on Monday and the same for the week, so i strongly advise adding shorts and putting in stops on longs and selling them.
Oil Gold and Silver EFT
I am still bearish on all of them because their huge volume

Mar 15 07:44 PM

[Minlita:]

On Mar 10 05:59 PM Whitehawk wrote:

> What worries me about this and other 2x, 3x long vehicles is that
> they have been driven down dramatically since they first traded last
> year, and many now trade in the low single digits. On the upside
> they don't appear to increase 2x, 3x the underlying sector moves.
> I've been disappointed with DXO for this reason and think FAS may
> in fact show similar behavior. We are at a disadvantage without years
> of data and behavior, of course.
> Anyone care to comment on this?

1 - EFT provaiders and taxes
Rydex and ProShares (ETF providers) paid out capital gains tax distributions (huge) in December, this affected all inverse ETF and ranged from 4% to 86%.

2 - Short ETFs and the index volatility
Short ETFs are designed to provide 1X 2X or 3X the inverse daily performance of the underlying index.
For longer periods (weeks, months, years) the index volatility can affect the performance.
Higher index volatility cause the effect of compounding to be more pronounced and lower index volatility produce a more muted effect (see Prosheres website).
Higher volatility ETFs will tend to produce larger draw downs than lower volatility ones

My adviced is:
- For a mirror image of the underlying index, consider shorting an ETF that tracks the index rather than buying a short ETF.
- If the ETF jumps 20/30 points in a day take some profits.
- Short EFT and volatile sector ETFs should only be used for short periods of time.
- The "short market cap" ETFs (see ProShares wesite)can used longer bets on cyclic bear markets or as trading vehicles if you are nimble enough.
- Set up a exit strategy EFT are not for long periods of time
- For identify ETFs with different levels of volatility, I suggest using the Normalized Average True Range (N-ATR) indicator. This lets you see ATR expressed as a percentage of stock price, making it directly comparable between different markets and instruments. The N-ATR can be use to pick ETFs with higher or lower relative volatility. The most price-active ones will have daily N-ATR above 2%
- Compare the performance of ETFs with different volatility characteristics in terms of your one trading system.
- ETFs do what they do by owning derivatives and so it’s not a perfectly transparent implementation

Mar 15 09:09 PM