Advisors in Focus- January 25, 2021

Markets are off to a volatile start for what should be a busy week of headlines. Earnings will be front and center as we have over 20% of the S&P reporting, including 5 of the top 10 weighted components. Indices continue to hold bullish patterns which bodes well for the markets but participants are keeping an eye on the exuberant environment. Gamestop (GME) highlights the latest ‘craze’ as we see short squeezes take hold and drive shares higher exponentially. This has had traders sifting through data to find the highest short interest names and drive those shares higher.

Veterans of the stock market are definitely wary of the price action. The amount of liquidity in the market has inflated valuations across the equity board. This backdrop makes Wednesday’s Fed meeting all the more interesting. The Fed has paraded out its members to put out a united front on its intentions so the market is not expecting any surprises. But it would appear that some Financial Advisors are still looking for ways to hedge against potential disruptions.

Picking tops in this rally has not been a profitable strategy. However, being prepared for a possible correction is always prudent. It would certainly appear that FAs are looking for downside protection given the search patterns. With that in mind, we wanted to provide some insight into inverse plays that your peers have been researching over the past week.

  • Trivia Question- Decades before the market crash of 1929, a famous author said, “October. This is one peculiarly dangerous month to speculate in stocks. The others are July, September, April, November, May, March, June, December, August, and February”. Who was this author? (Answer below)

TrackStarIQ Data

1SPDR S&P 500 ETFSPYVanEck Vectors Gold Miners ETFGDXXLYSBB
2VanEck Vectors Gold Miners ETFGDXSPDR S&P 500 ETFSPYVCRDOG
3ProShares Ultra Short Russell 2000TWMFirst Trust ISE-Revere Natural Gas Index FundFCGIBUYSH
4Technology Select Sector SPDR FundXLKProShares Ultra VIX Short-Term FuturesUVXYBETZPSQ
5Invesco QQQQQQiShares Russell 2000 ETFIWMONLNSEF
6ARK Genomic Revolution ETFARKGVanEck Vectors Junior Gold Miners ETFGDXJBJKEMTY
7Energy Select Sector SPDR FundXLEVanEck Vectors Oil Services ETFOIH DDG
9ProShares UltraPro Short QQQSQQQiShares MSCI Emerging Markets ETFEEM GNAF
10Global X Lithium ETFLITUtilities Select Sector SPDR FundXLU
11ProShares Ultra VIX Short-Term FuturesUVXYSPDR S&P MidCap 400 ETFMDY
12SPDR Gold TrustGLDFirst Trust Dow Jones Internet IndexFDN
13iShares Global Clean Energy ETFICLNInvesco DB Agriculture FundDBA
14Invesco Water Resources ETFPHOInvesco DB Base Metals FundDBB
15iShares Silver TrustSLVProShares DJ Brookfield Global Infrastructure ETFTOLZ
16Invesco WilderHill Clean Energy ETFPBWMicroSectors FANG+ Index -3X Inverse Leveraged ETNFNGD
17iShares Russell 2000 ETFIWMiShares Core S&P Mid-Cap ETFIJH
18iShares MSCI Emerging Markets ETFEEMInvesco Global Listed Private Equity ETFPSP
19VanEck Vectors Junior Gold Miners ETFGDXJiShares Global Clean Energy ETFICLN
20Invesco Solar ETFTANInvesco DB Energy FundDBE
  • ProShares Ultra Short Russell (TWM); #3 in Top ETFs by all FAs- This is a 2x inverse exposure to small-cap companies. As with most inverse ETFs, this is more of a trading instrument given the natural time decay witnessed in inverse instruments. The Russell is dominated by the financial sector and also has representation from tech, consumer cyclical, and industrial firms so this is a bet against those industries. The TWM has enough liquidity, $203 mln Assets Under Management and an Average Daily Volume of $13 mln, to suffice for traders. We have seen a rotation back into some of the big tech names the past few weeks which is what likely led to the FA search into this instrument. If we see the fiscal stimulus talks fail, then small caps with domestic exposure could continue to see pressure. This is one instrument that can help FAs hedge against a down turn.

  • ProShares UltraPro Short QQQ (SQQ); #9 in Top ETFs by all FAs- This is a 3x inverse instrument with exposure to the 100 largest non-financial issues listed on the Nasdaq. The fund uses swaps on Nasdaq futures in order to obtain this exposure. This instrument provides plenty of liquidity as it has $1.57 bln Assets Under Management and $745 mln in Average Daily $ Volume. As with most inverse instruments, the time decay has led to a drift lower in the SQQQ as it has slid to the $13.39 area and is down 10% year-to-date. This would be an instrument FAs would use to offset any decline in the tech sector.

  • ProShares Ultra VIX Short-term (UVXY); #11 in Top ETFs by all FAs- This is a 1.5x leveraged exposure to short-term VIX futures. This is a bet on volatility in the S&P 500. Participants who were looking at this instrument would have been rewarded this morning after we saw an early rally in markets run into a nasty reversal, led by tech. The market is certainly set up for potential volatility given the amount of earnings headlines and the Fed. We also have a market that has seen heavy action in call activity with limited downside protection being used by traders.

  • Inverse Equity Spotlight-  We focused on Consumer Discretionary and Inverse Equities in our spotlight section this week. Some of the Inverse ETFs that FAs were searching included the ProShares Short Small Cap (SBB), the ProShare Short Dow (DOG), the ProShares Short S&P (SH), the ProShare Short QQQ (PSQ), ProShares Short FInancials (SEF), and the ProShare Decline of the Retail Store (EMTY). A pretty broad swath of inverse names which suggests FAs are nervous about the market as a whole. We will continue to monitor this arena incase we see downside protection turn into a trend.

Trivia Answer- Mark Twain

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