Good Retail Sales numbers had the market opening higher, but that quickly reversed. Equities were unable to catch a bid as the SPX struggled to get above its 20D-SMA. The near term weakness in the market continued as the averages traded sideways for most of the session. There was a decent amount of selling going on as breadth was fairly negative. The major averages ended slightly lower on the day, with volume waning and staying below average. At the close, the DJIA fell 5.2 points, the SPX inched down 1.2 points, and the NDX slipping 0.44 of a point. Breadth was negative, 1.8 to 1, on below average volume. ROC(10)’s declined, with the SPX the only index remaining in negative territory. RSI’s were nearly steady, with the DJIA continuing to lead with 62.3. The NDX and SPX are remain in the low to mid 50’s. MACD’s remain below signal for all three major indices. The ARMS index ended the day at 0.86, a slightly bullish reading. The major indices could not find a direction on Tuesday and traded in a very narrow range. Breadth was fairly negative, as indicated by an almost 1% loss in IWM(Russell 2000). The NDX closed at 5907, barely holding its 20D-SMA which sits at 5905. It remains comfortably above its 50D-SMA of 5808. The near term weakness continues for the NDX and SPX. They both have seen their RSI’s declining since July 27. The SPX was unable to close above its 20D-SMA of 2470. It traded as high as 2468, but closed at 2464. It does remain above its 50D-SMA of 2449. The DJIA remains the strongest of the three indices, closing just under 22000, at 21998. The VIX fell 2.3 to finish at 12.04. After a spike in the index, it moves back to low volatility. Near term support for the NDX is at 5905, 5900, and 5875. Near term resistance is at 5919 and 5925. Near term support for the SPX is at 2450, 2449 and 2425. Near term resistance is at and 2470 and 2480. Europe is higher in early trade. US Futures are pointing higher in the pre-market.
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TODAY’S DATE, UNLESS OTHERWISE INDICATED
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Data sources include ETF Database, ETFTrends.com, IndexUniverse.com, Google Finance, and Bloomberg data and at times other data sources are utilized. Leveraged, Inverse & Leveraged Inverse Conclusions and Risks 1) Leveraged, Inverse, and Leveraged Inverse (L&LI) ETFs generally capture a high percentage of their expected daily returns, particularly on a net asset value basis. 2) L&LI ETFs are not appropriate for all investors. However, we believe they can be appropriate tools for some investors looking to make short-term tactical trades if they perceive a high likelihood of a strong market move occurring in a relatively short time period. In strong trending markets, being on the right side of the “trade” with L or LI ETFs can lead to very strong returns. 3) Investors should not expect these ETFs to deliver total returns linked to their benchmarks over any period other than daily. The effects of compounding and the daily re-leveraging or de-leveraging that occurs with L&LI
ETFs can lead to unexpected results over the long term. As a result, we believe longer-term investors should consider regularly rebalancing positions. 4) Trendless markets, particularly those with a high level of volatility, can lead to substantial relative underperformance of L&LI ETFs. 2) Leveraged and Leveraged Inverse (L&LI) ETFs typically utilize futures and equity swap agreements. The use of these derivative instruments increases risk and enhances the possibility of tracking error.
Relative to traditional ETFs, leveraged, inverse and leveraged inverse ETFs typically have higher costs and lower tax efficiency. 3) The effects of compounding can lead to significant deviations from traditional benchmarks over longer time periods. For example, if $100,000 is invested in an index that increases in value by 10% on day one and then decreases in value by 10% on day two, the investment will be worth $110,000 at the end of day one and $99,000 after day two. However, the value of a security that doubles the daily performance of the index would be worth $120,000 on day one and $96,000 after day two. Thus, the index is down 1% after two days, a doubling of which would be down 2%. However, the security attempting to double the return of the index is down 4%. Investors should consider carefully the potential impact over longer periods. MLP and MLP ETF Risks Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance on the capital markets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity volume risk.
For tax purposes, MLP ETFs are taxed as C corporations and will be obligated to pay federal and state corporate income taxes on their taxable income, unlike traditional ETFs, which are structured as registered investment companies. These ETFs are likely to exhibit tracking error relative to their index as a result of accounting for deferred tax assets or liabilities (see funds’ prospectuses). The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund’s value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. Commodity ETF Risks Commodity ETFs may be subject to greater volatility than traditional ETFs and can be affected by increased volatility of commodities prices or indexes as well as changes in supply-and-demand relationships, interest rates, monetary and other governmental policies, or factors affecting a particular sector or commodity. Currency ETF Risks Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. ETFs mentioned at times may have material exposure to small cap and/or international securities that may have higher levels of risk and volatility than other ETFs.
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