Direxion ETFs Can Help You Cut Your Losses

Direxion ETFs can help you cut your losses and generate alpha. Just take a closer look at the S&P 500 and economic indicators from the first half of 2019.

Despite the US-China trade war taking the front seat in the second quarter of the year, the S&P 500 had an overall good first half. The index started the year at just over 2,500 and ended the first half just short of 3,000, up 17.4%. On an annualized basis, that’s a 37.8% gain. The Direxion Daily S&P500 Bull 3X Shares ETF (SPXL) has made a killing with 60.4% returns so far in 2019 even though the S&P500 index has retreated from highs. The American economy has been in the expansion zone for a decade now. And the expectation of rapid rate cuts, if they prove warranted, could push US equities and ETFs up even further—especially with bond yields continuing to fall.

The unemployment rate, although slightly up from a 50-year low, remains muted at 3.7%, although there are signs of a slowdown in the labor market. Retailers like Costco and Target are hitting new highs this quarter. When it comes to ETFs, the Direxion Daily Financial Bull 3X Shares (FAS) has yielded a 74.14% return so far in 2019 (as of September 9).

However, there are some dark clouds. Despite the truce announced after the G20 summit, the US-China trade war remains unresolved. The US manufacturing PMI is indicating contraction after a decade of expansion. And the global manufacturing PMI continues to be in contraction. Inflation around the world remained below central banks’ targets even though interest rates are low. This trend reduces central banks’ ability to use monetary policy tools for economic growth. June’s US consumer confidence index dropped in August after rebounding in July. Plus, the risks of a recession are rising.

With the S&P 500 surging and economic indicators under pressure, a lot of companies rushed to public markets. They hoped to raise money before it was too late. The second quarter saw 62 companies raising $25 billion in public markets—the most raised in the past 20 quarters. Tech and biotech sectors led the pack as Uber (UBER), Lyft (LYFT), Slack (WORK), and Beyond Meat (BYND) tapped public markets at eye-popping revenue multiples.

Uber, the biggest IPO so far this year, failed to excite. Slack is also down from its debut high. Worse, WeWork may go public at less than half its private valuation. Sixty more companies are looking to raise $11 billion in the second half of 2019, with many more big names to follow.

I can’t help but draw parallels between the current market and the one back in 1997–98. For most of those two years, the S&P 500 was going strong. It traded at a multiple of 20+ while the IPO market was still hot. Inflation was low, and oil was cheap. While the economy grew steadily, unemployment was starting to move up. With low inflation and rising unemployment, the Fed was loosening its purse. The Fed funds rate dropped by 75 basis points in the last four months of 1998. And the Fed was, in fact, seen as overly dovish.

The economy and the markets were giving mixed signals, making investors wary while instilling FOMO. On the one hand, there was the promise of continued expansion. But on the other, there was the risk of a meltdown.

While the situation is similar today, we have many more tools and investment alternatives than we did back in the ’90s.  Direxion ETFs offer a chance to build a two-tier portfolio. You can allocate to offensive sectors to take care of your FOMO while keeping risks covered through defensive allocation.

We’ll turn our focus now to specific sectors and China. You’ll see how you can use Direxion ETFs to build a defense-offense portfolio that covers your risks while keeping potential upside open.

After underperforming the broader market in 2018, the semiconductor sector has bounced back nicely in 2019 so far. Even the ongoing trade worries haven’t managed to spoil the party! Semis’ phenomenal performance has pushed the Direxion Daily Semiconductor Bull 3x Shares (SOXL) up by a whopping 112.98% this year (as of September 9). Also consider the Direxion Daily Technology Bull 3X shares (TECL), which holds semis by the dozen. It’s more than doubled in value. Meanwhile, the Direxion Daily S&P 500 Bull 3X shares ETF has returned 60.4%. Not bad, of course—but semis’ performance has dwarfed the broader market.

If you feel like there’s more steam left in the tech sector, you can go long on the Direxion Daily Technology Bull 3X shares (TECL). But if you’re sure the party won’t last for the rest of the year, reduce your exposure by going long on the Direxion Daily Semiconductor Bear 3x Shares (SOXS).

No matter how bad the market is, you probably won’t go hungry unless you’re a big short with loads of money. That makes consumer staples an ideal inclusion in your defensive portfolio. You might want to hold onto the Direxion Daily Consumer Staples Bull ETF (NEED) if you think the sector will grossly outperform the broader market.

If employment stays strong and the Fed’s measures work as intended—meaning healthy expansion continues—we may see healthy demand for the consumer discretionary sector. Are you betting on the space? If so, turn to the Direxion Consumer Discretionary Bull 3X Shares ETF (WANT) and you may be three times luckier!

With the expectation for more accommodative monetary policy in the cards, the sector has the potential to outperform. You can especially expect outperformance in the case of prolonged global trade tensions and mixed domestic indicators. Does your instinct strongly suggest that the Fed will be more accommodative and that the economy will be under pressure? Then it makes sense to park your money in the Direxion Daily Utilities Bull 3X Shares ETF (UTSL). The fund has provided a 60.7% return so far in 2019.

Oil prices are suppressed, and geopolitical tensions are at play—especially in Iran. But as we’ve seen before, oil investors just need simple reasons to feel good about oil, and we think they’ll start smiling in no time. When they do, the Direxion Daily Energy Bull 3X Shares (ERX) could be your winning horse.

On the other hand, if the oil supply glut stays in place and the global economy remains under pressure, you may want to short the sector. Don’t worry. The Direxion Daily Energy Bear 3X ETF (ERY) can help you when oil companies take a hit.

The biotechnology sector has been under pressure so far in 2019. That could also make them a good entry point to enter the sector if you think this is a bottom. If it is, the Direxion Daily S&P Biotech Bull 3X shares (LABU) could be your winning bet.

The Direxion Daily Gold Miners 3X Shares ETF (NUGT) has been one of the best-performing ETFs in 2019 so far with over 83.45% returns. If the global economic climate remains gloomy and we see a flight to safety occurs, gold and gold miners could continue to benefit. NUGT could be your winning bet in this bearish scenario.

Another way to construct your portfolio is by playing the game of scale. So far in 2019, the S&P 600 small caps have underperformed the S&P 500, posting 11.65% returns. But small caps’ fortunes can turn around substantially if global conditions improve and the Fed cuts rates. So keeping the Direxion Daily Small Cap Bull 3X Shares (TNA) in your portfolio for a strong offense in case of an economic “melt-up” is a solid strategy.

In case of diminishing risk appetite at the peak, a flight to relative safety might make more sense. Shorting small caps while going long on blue chips could be the right move. Direxion offers a chance to do that through its wide range of leveraged and inverse ETFs. Simply go long on SPXL and Direxion Daily Small Cap Bear 3X Shares (TZA) and you’ll have your alpha.

It’s true that the Chinese economy is growing at its slowest pace in decades. And the trade war is clearly hurting China. While the government has kept its hands tied on big stimulus, it won’t stay quiet if the trade war keeps up. Moreover, if both superpowers reach an agreement, Chinese equities might see further upside. Despite the trade war, China’s Shanghai Composite Index has returned 21.1% so far in 2019.

If you have reason to believe China will outperform developed markets, going long on China while shorting the developed markets is the way to go. You can invest in China through the Direxion Daily CSI 300 China A Share Bull 2x Shares ETF (CHAU). At the same time, you can go short on developed markets with the Direxion Daily Developed Markets Bear 3X Shares (DPK).

If you believe otherwise, you can short China by investing in the Direxion Daily CSI 300 China A Share Bear 1X Shares (CHAD). Meanwhile, you can also bet on developed markets through the Direxion Daily Developed Markets Bull 3X Shares (DZK).

Direxion’s inverse and leveraged ETFs give you a chance to generate substantial alpha over the market. Whatever direction the market or sectors take, Direxion has something to offer to your portfolio. If you’re an informed investor with a strong opinion on the market or a specific sector—and you have the risk appetite to support your opinion—Direxion is the right fit.