The S&P 500, which hit multiple highs last week, will have a tough ride in the months ahead given that a rate hike is on the cards.
Last Friday, the Fed indicated that it is on track to raise the interest rates - the first time since 2006 if the world's largest economy continues to improve - albeit at a slow pace. This might lead to a rates hike in September. An accelerating job market and the string of better-than-expected economic data of late lent support to the Fed's outlook of pairing stimulus.
Rate Hike Getting Closer
Among the most notable data, U.S. home sales jumped 6.8% in April after dropping 10% in March. Home prices rose at a steady pace of 5% year over year in March, according to the S&P/Case-Shiller Home Price Index. This is well below the double-digit gain in late 2013 and early last year.
Orders for capital goods in April rose 1% for the second month in a row, indicating signs of increasing business investments. On the other hand, consumer confidence, measured by the Conference Board, rose to 95.4 in May from the revised 94.3 in April and higher than the economist expectation of 94.9 as per Reuters poll. All these suggest that the economy is picking up momentum after a weak first quarter.
The most important factor in the rate hike decision - inflation - has been picking up lately, strengthening the case for the rates hike. Core consumer prices in April climbed for the third consecutive month rising 0.3%, representing the largest increase since January 2013. Based on upbeat economic data, the U.S. dollar regained its ascent, and dampened the appeal for equities.
While the prospect of higher rates is the major issue currently looming in the market, the Greek debt drama and political developments in Spain are also weighing on the U.S. stocks. Greece might default on its debt repayments to the International Monetary Fund due on June 5 in the absence of new reforms.
Apart from these, the most popular trading proverb "Sell in May and Go Away" might also play foul in the stock market in the summer months. This is because most of the investors believe in this old saying and sell their stocks in May to avoid the seasonal decline in the equity markets during the summer months (from May end to early September).
Given this, the S&P 500 will likely see rough trading ahead, pushing the stocks down, and investors could easily tap this opportune moment by going short on the index. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to the index. Below, we highlight those and some of the key differences between each:
ProShares Short S&P500 ETF (NYSEARCA:SH)
This fund provides unleveraged inverse exposure to the daily performance of the S&P 500 index. It is the most popular and liquid ETF in the inverse equity space with AUM of nearly $1.5 billion and average daily volume of around 3.2 million shares. The fund charges 89 bps in annual fees.
ProShares UltraShort S&P500 ETF (NYSEARCA:SDS)
This fund seeks two times (2x) leveraged inverse exposure to the index, charging 89 bps in fees. It is also relatively popular and liquid having amassed $1.4 billion in AUM and 8.1 million in average daily volume.
ProShares UltraPro Short S&P500 (NYSEARCA:SPXU)
Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3x) inverse exposure to the index. Though the ETF charges slightly higher fee of 92 bps per year, trading volume is solid, exchanging about 4.2 million shares per day on average. It has amassed $605.1 million in its asset base so far.
Direxion Daily S&P 500 Bear 3x Shares (NYSEARCA:SPXS)
Like SPXU, this product also provides three times inverse exposure to the index. However, it charges a bit higher expense ratio of 0.95% and average daily volume also fell short of a million shares. It has AUM of $288.7 million.
As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis.
Still, for ETF investors who are bearish on the equity market for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the "trend is your friend" in this corner of the investing world.