Playing Investor Sentiment with ETFs

Jun. 19, 2011 11:54 PM ETSPY, DIA, SSO, SPXL, SH, DOG, SDS, SPXS
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Long/Short Equity, Growth, IPOs

Contributor Since 2011

The author is an Enrolled Agent and corporate finance officer in Utah. He is a graduate of Strayer University and a member of the National Association of Enrolled Agents.

In the recent “good news, bad news” market cycle, where the markets seem poised to overreact to every bit of news that hits the wire, I look to take advantage of investor sentiment by investing in broad market, speculative ETFs, in lieu of individual securities.
There are several offerings that allow investors to profit from movement in the underlying indexes in both bull and bear markets. The straightforward ETFs, such as DIA, simply seek to replicate the performance of the underlying index, in this case the DJIA. The inverse ETFs, DOG, for example, seek to replicate the inverse of the performance of the underlying index, here too the DJIA. For a leveraged position, investors can choose an ultra ETF. There are eight choices I like to consider for this strategy:
If I am bullish on the market I will buy the following ETFs:
  • SPY – nonleveraged long position in the S&P 500
  • DIA – nonleveraged long position in the DJIA
  • SSO - 2x leveraged long position in the S&P 500
  • BGU - 3x leveraged long position in the Russell 1000
If I am bearish on the market I will buy the following inverse ETFs:
  • SH - nonleveraged short position in the S&P 500
  • DOG - nonleveraged short position in the DJIA
  • SDS - 2x leveraged short position in the S&P 500
  • BGZ - 3x leveraged short position in the Russell 1000
The coming week provides several opportunities to gauge investor sentiment. First and foremost, all eyes will be on Greece and investors will be closely monitoring market reactions to news out of the EU. Additionally, the weekly economic calendar presents significant potential for moving the indexes. On tap for the coming week are Bernanke’s assessment of the economy on Wednesday and durable goods orders on Friday.

Economic Calendar
Date Report Consensus Previous
June 21 Existing Home Sales 4.7M 5.05M
June 23 Jobless Claims 418,000 414,000
June 23 New Home Sales 305,000 323,000
June 24 GDP Estimate 1.8% 1.8%
June 24 Durable Goods 1.0% -3.6%

Overall, market sentiment seems to be bearish. Investors appeared to be selling into the rally on Friday after seeing Wednesday's gains erased in Thursday's slide. From a technical perspective, this is a difficult market to time. Nevermind fundamentals, I believe they are largely irrelevant for the next several weeks, until we approach earnings season. That leaves political and economic news as the prime motivator of investor sentiment. Consequently, I prefer the diversification of the index based ETFs.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BGZ, SDS, DOG over the next 72 hours.
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