Will UPRO's Uptrend Resume?

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About: ProShares UltraPro S&P 500 ETF (UPRO)
by: Todd Akin
Summary

UPRO has had more than three days down, major moving average support is coming into play, and U.S. economic growth remains strong.

However, UPRO’s RSI has not gotten oversold enough, and the VIX is not high enough, to warrant starting an aggressive long position.

Even though economic growth is strong, certain headwinds could derail growth, such as rising rates or failed China trade talks.

Therefore, signals are mixed on a fundamental and technical basis. But this tug of war often provides the wall of worry that is necessary to push bull markets higher.

As a result, I am staying long UPRO.

The ProShares UltraPro S&P 500 ETF (UPRO) had a healthy pullback from its highs set in 2019, as the three day down rule is in effect, major moving averages are coming in as support, and the RSI is nearing oversold conditions. Usually, when events like these occur in a stock or ETF, a rally ensues.

The U.S. economy is also growing moderately at 2.6% GDP, which is strong enough to prevent a recession, but weak enough to not warrant an interest rate hike.

Therefore, the market might have had its necessary breather, and the stars are aligning for UPRO to resume its uptrend back to 2018 highs.

As a result, I remain long the fund.

UPRO Overview

UPRO’s expense ratio of .92% is low considering it is leveraged. However, investing in leveraged ETFs can be risky since various instruments are used, such as options and derivatives, to accomplish these goals. Here is the official description of UPRO:

The investment seeks daily investment results - before fees and expenses - that correspond to three times (3x) the daily performance of the S&P 500-® Index. The fund invests in financial instruments that ProShare Advisors believes- in combination- should produce daily returns consistent with the fund's investment objective. The index is a measure of large-cap U.S. stock market performance. The fund is non-diversified.

Warning: Leveraged exchange-traded funds ((ETFs)) are designed to achieve their investment objective on a daily basis meaning that they are not designed to track the underlying index over an extended period of time. Leverage can increase volatility. Inverse ETFs attempt to deliver returns that are the opposite of the underlying index's returns. Typically, the longer you hold a Leveraged or Inverse ETF, the greater your potential loss.

Accordingly, Leveraged and Inverse ETFs may not be suitable for investors who plan to hold positions for longer than one trading session. These products are designed for highly experienced traders who understand their risks, including the impact of daily compounding of leveraged investment returns, and who actively monitor their positions throughout the trading day. Please read the Prospectus carefully before making your final investment decision.

The other risks seen are that many holdings in the S&P 500 have not made their corrections like others in the market have.

Companies such as Boeing (BA), Apple (NASDAQ:AAPL), Amazon (AMZN), Netflix (NFLX), and even energy companies like EOG Resources (EOG) all have significant downside left in shares. Actually, with news of an Ethiopian airline crash, and China pushing back on airline orders of their own, BA is finally correcting.

When companies like BA and industrials tied to their business fall on a given day, the market can still rally in a strong way. This is how the S&P 500 averages a 9% gain per year - through its stellar diversification of top-notch companies.

UPRO Technicals Bullish

As investors can see below, UPRO has had 5 red candles down (five-day down rule), the 100 day moving average is coming in as support (brown line), and the RSI is approaching 40 (not oversold, but 40 in times past usually resulted in a rally). Source: E*TRADE

Furthermore, the MACD could be diverging wide enough for a cross up which, again, usually leads to a rally in the share price. Let’s take a look at the max timeframe chart below of UPRO in order to get more context.

Technicals look less bullish on a max timeframe, and are painting more of a neutral scenario for investors. The MACD looks like it is in danger of crossing to the downside, but the RSI is right in the middle of its range, in no man’s land, similar to on a one year-chart.

Source: E*TRADE

Ultimately, it is nice to see the stars align on one year and max timeframe charts.

But, if the signals are mixed, it gives investors less enthusiasm to buy. There is one silver lining, however, which is that the technicals are not flashing outright sell signals, either.

Therefore, while the market may not have the legs to go higher when based on the information given above, at least sellers have less initiative to sell. So the market could remain rangebound, if nothing else, which is better than a correction.

VIX

With the information given above, so far, signals are mixed. The RSI is in the middle of its range on a one year chart, and the MACD could be crossing to the downside on a max timeframe chart.

Support lies underneath UPRO, which is a positive, and more than three down-days have occurred. But let’s see what the VIX volatility index is saying in order to get a more complete picture of which direction the market is headed. Source: E*TRADE

As investors can see above, the VIX is in the middle of its range, as well. When the VIX is high, it’s time to buy. When the VIX is low, it’s time to go. This is an old adage that has served investors well in the past.

So, being that the VIX is still low, or fear in the marketplace is low, this means that the VIX needs to go higher before investors are scared enough to increase put/call ratios. This is how larger buying opportunities present themselves.

Risks

UPRO has considerable headwinds facing it at the moment, such as China trade tariffs and rising rates, both of which can derail the U.S. economy.

I believe these risks are somewhat muted at the moment, however, because it is in Trump’s best interest to work an amicable deal for both sides, and the Federal Reserve has signaled that it will slow its pace of rate hikes.

Of course, risks are always present for leveraged ETFs, such as time decay and losses from sideways volatility.

However, since UPRO is tied to a major market index, the S&P 500 (NYSEARCA:SPY), that has real value, time decay is less of an issue (as opposed to commodity ETFs that are based on pure derivatives and commodity prices, not fundamentals).

Conclusion

UPRO has had a large run from its lows set in 2018, but a sizable pullback has occurred that is forcing investors to take a hard look at their positions. The question that many have to be asking themselves is, is this just a bear market rally?

Conversely, there are investors who were late to the party who are wondering, is this is their second chance to get in to the bull market? After all, this recent pullback in March is about the largest we have had since the 2018 rally, which went virtually straight up from the bottom.

I believe that this recent market dip is a just a a pause in the action, and the uptrend should resume. This is due to the fact that technical signals are mixed, and when there is no outright reason to sell, usually this leads to a drift up in the market when macro conditions are right (which they are).

Therefore, investors who were on the sidelines and late to the party before can use this dip as an opportunity to get back into the game, as long as a stop loss is placed the below the 50 day moving average.

As for me, I am not buying the dip since I sold calls and only trimmed a quarter of my position at the recent highs set last month in February.

In closing, UPRO is flashing mixed signals. But since economic growth remains strong at 2.6% GDP, and markets usually need a wall of worry to climb anyway (mixed signals, trade tariffs, etc.), I have no reason to believe that this latest dip is the beginning of a bear market, and am staying long UPRO as a result.

Disclosure: I am/we are long UPRO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.