Contributor Since 2009
Decent GDP and Home Sales reports Wednesday morning, helped push the DJIA and SPX to early gains. The NDX continued to move lower as AMZN and NFLX were taking it on the chin. The FANG stocks came off one of their worst days on Tuesday and the weakness continued. The DJIA and SPX traded in a choppy manner on both sides of the flat line. By the end of the day, the NDX continued its losing ways with another significant loss. The DJIA and SPX closed with losses of only a few points. At the close, the DJIA fell just 9.2 points, the SPX slipped 7.6 points, and the NDX lost 1%. Breadth was slightly positive, on above average volume. ROC(10)’s were mixed with the DJIA and SPX advancing and the NDX declining. All three major indices remain in negative territory. RSI’s moved slightly lower in the session, with the strongest being the DJIA at 38.9. The SPX finished at 37 and the NDX at 36.5. All three major averages continue with their MACD below signal. The ARMS index ended the day at 1.05, which is a neutral reading. Tech stocks continue to move lower on technical, political and legal issues. They continue to drag down on the major indices, specifically the NDX. The NDX closed at 6460, which is just below its 1 year Trend-line of 6500. It holds just above its 10% correction level of 6418. The NDX is well below its 50D-SMA of 6811. The NDX ended the day just below its lower Bollinger band of 6477. The DJIA ended the day at 23848, just above its 1 year Trend-line of 23800. It is below its 10% correction level of 23955. It holds above its 200D-SMA of 23398 and it lower Bollinger band of 23668. The SPX closed at 2605, just below its 1 yr. trend-line of 2612. It closed just above its 10% correction level of 2587. The SPX holds just above its 200D-SMA of 2588. The VIX added 1.6% to finish at 22.87. Near term support for the NDX is at 6450 and 6418. Near term resistance is at 6500 and 6550. Near term support for the SPX is at 2600 and 2588. Near term resistance is at 2612 and 2625. Europe is trading higher in early trade. US Futures are pointing higher in the pre-market.
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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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