Index ETF Plays for a Potential Rise in the Market

by: Yatin Karnik

U.S. stocks closed moderately higher Tuesday, with the Dow Jones industrial (NYSEARCA:DIA) average up 65.16 points, or 0.53%, to end the day at 12,266.75, which was a relief after its worst point and percentage loss since March 16, yesterday. The S&P 500 (NYSEARCA:SPY) Index was higher by 7.48 points, or 0.57%, to finish the day at 1,312.62. Nasdaq (NASDAQ:QQQ) added 9.59 points, or 0.35%, to close at 2,744.97.

Stocks were battered on Monday because of Standard & Poor's threat to lower the U.S.'s long-term triple-A rating within the next two years, Greece talking about restructuring its debt and China raising reserve requirements for its banks. But Tuesday brought some relief for the U.S. stock market, as traders argued that S&P's warning will force the U.S. government to get their fiscal house in order, which is good for the markets.

In my opinion, with Standard & Poor's comment, traders will start to focus on outlook in the U.S. and globally versus focusing on corporate earnings. I just don't think beating or missing by a few pennies on the earnings front is going to define the direction of the market. For the remainder of the week, the focus will be on GDP growth projection here in the U.S.

Intel (NASDAQ:INTC) reported earnings after close on Tuesday. Intel's first-quarter adjusted earnings were 59 cents a share. Analysts polled by Thomson Reuters had expected earnings of 46 cents a share. Net earnings at Intel rose to $3.2 billion, or 56 cents a share, from $2.4 billion, or 43 cents a share, in the year-earlier quarter. Some other companies like IBM (NYSE:IBM), Yahoo (NASDAQ:YHOO), VMWare (NYSE:VMW) and Juniper Networks (NYSE:JNPR) also reported after the close on Tuesday. The cumulative effect of price action on all these companies lifted the Nasdaq composite (QQQ) by 0.5% after hours.

I think if the S&P 500 can manage to stay above 1,300 this week, which it has managed to so far, stocks will be positioned for a move higher. Bulls will target a close above 1,325. But if S&P manages to close below 1,300, then the next downside target would be 1,285 and bears will ultimately want to take it down to 1,255. Despite a deep sell off in the market on Monday, VIX (Volatility index, also referred to as the fear gauge) was up only 10.70% for the day. It was as high as 19.07 at one point of time on Monday but managed to close the day on the low of the day at 16.96. VIX continued to sink with rise the S&P index on Tuesday. VIX closed the day down 1.13, or down 6.66%, to close at 15.83. This type of action in the VIX suggest that traders might be positioning themselves for a rise in the market in coming days. It also suggests that traders might be positioning themselves for a rise in the market in coming days.To benefit from climb in S&P, you can get long exposure to SPY or SSO (ProShares Ultra S&P). You could also benefit by getting short exposure to SDS (ProShares UltraShort S&P). In case the S&P breaks out to the upside; I have no reason to believe that Dow Jones Industrial average won't make new highs. To benefit from rise in Dow, I recommend getting long exposure to DIA or DDM (ProShares Ultra Dow). You could also double the return from rise in Dow Jones Industrial from getting short exposure to DXD (ProShares UltraShort DOW).

For more experienced traders who want to bet on specific segments within the S&P index, there is IVV (that tracks large-capitalization U.S. stock market performance), MDY (that tracks the S & P MidCap 400 index), IWM (that tracks the Russell 2000 index) and IJR (that tracks S&P SmallCap 600 index).

Disclosure: I am long SPY.