Sorry for the seeming bait and switch. But actually our stock of the week is an ETF. And more than that, it is a 3X inverse ETF that rallied +41.49% on Monday while the S&P (SPY) fell to new lows.
That ETF is the Direxion Daily Small Cap Bear 3X Shares (TZA).
The idea of shorting the market with an inverse ETF should not be so novel at this point as we are already head deep into a nasty bear market. And likely will be in this mode for quite some time longer (for more on the topic on the length of the bear market, then check out this recent commentary: Long Bear vs. Short Bear?).
But why specifically select TZA?
First, we all know the expression of “Flight to Quality” at the onset of any stock market correction. And even more true during a bear market. This means that investors will cling to the safest stocks in their portfolio which skews to large caps. This also puts smaller stocks on the chopping block as they will more likely be sold leading to even larger declines.
Monday is a great example of this in action. The S&P (SPY) was downright ugly at -11.98%. But even worse was the hideous -14.27% beating of the small caps in the Russell 2000.
However, when you are shorting small caps, the ugliness becomes downright beauty as the gain accumulates in your pocket. Then you get to triple your pleasure with more the 3X leverage. That makes TZA a particularly appealing choice at this time.
Now back to the bigger issue…why should folks consider an inverse ETF at this time?
Until there is some sign of containment on the Coronavirus, then we should all expect to stay home longer…and most everything else closed down. This will equate to SERIOUS economic damage which is why the Fed dramatically lowered rates to zero over the weekend.
Why didn’t stocks jump on that news? Because it was a clear sign that they are deathly afraid of what comes next. Kind of like all the Fed actions in the Fall of 2008 in the wake of the Financial crisis. Yet all the while stocks continued to fall further and further until eventual bottom in arch 2009.
No, I am not a perma-bear by any stretch. And I very much look forward to finding bottom in coming months to start riding the bull again. But right now the tea leaves say that more downside is likely in the offing and a position like TZA make a heck of a lot of sense at this time.
By The Way…
TZA is just 1 of 3 inverse ETFs that I have in the Reitmeister Total Return portfolio.
These downside insurance policies are a big part of my current hedged strategy that actually produced a +2.88% return on Monday while the market sank 12%. It is not too late to get on board this strategy if you have not protected yourself already.
Going forward I will look for spots to emerge from the hedge by buying more and more undervalued stocks for the eventual return to a bull market.
I know its crazy out there. And I am trying my best to help investors make sense and profit from the situation. The best way for me to do that is give you 30 days access to the Reitmeister Total Return.
This is my newsletter service where I share more frequent commentaries on the market outlook, trading strategy, and yes, a portfolio of hand selected stocks and ETFs to produce profits whether we have a bull…a bear…or anywhere in between.
Just click the link below to see 5 stocks and 4 ETFs in the portfolio now, and all the future trades as we find bottom on this bear and the new bull emerges.
TZA shares fell $3.32 (-3.15%) in after-hours trading Monday. Year-to-date, TZA has gained 200.37%, versus a -25.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More…