Inverse-Leverage ETFs Regain Favor As S&P Breaks 1,000 (FAZ, SKF, SDS, DUG, SRS)

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It was just last week that the DJIA was on its eighth consecutive day of a rally and the junkiest of companies were running rampant.  But as the economic numbers started to finally bring in some growth, you finally started to see sellers come into play.  And now suddenly with a triple-digit drop in the DJIA comes the sound of concern from many wondering if we ran too far and too fast.  We did run too far and too fast and the moves started to price in probably what is a return to normal growth rather than muted growth.  And just like that, the interest in inverse exchange-traded funds is back.

Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) is probably the biggest go-to instrument for traders betting against the market because it offers triple-leverage in a bet against the financial stocks in the Russell 1000 Financial Services Index.  At 1:30 we have seen over 65 million shares trade hands and this 3X-leverage inverse ETF is up 10% at $25.55.  Average volume on most days is about 40 million, and now anyone who bought this one in the last 7 trading days is up.

The ‘slightly less bearish’ winner here is the UltraShort Financials ProShares (NYSE: SKF), which offers ‘only’ twice the inverse of the daily performance of the Dow Jones U.S. Financials index.  This has now seen over 25 million shares trade today and is up over 6% at $28.40 versus an average daily volume of roughly 29 million shares.

UltraShort S&P500 ProShares (NYSE: SDS) offers twice the inverse of the daily performance of the S&P 500 Index.  Shares are up 4% at $45.40 and its average volume of about 39 million shares should be eclipsed here in literally the next few minutes.

And then with oil busting under the $70.00 mark, you have the UltraShort Oil & Gas ProShares (NYSE: DUG) that offers twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index.  This one is up 3.5% but ‘only’ on 5.2 million shares versus an average of over 8 million shares per day.

Think the housing and real estate recovery is bogus?  There is the UltraShort Real Estate ProShares (NYSE: SRS) that is up over 6% at $12.20 on over 24 million shares versus an average daily volume of about 29 million shares.  This one offers twice the inverse of the daily performance of the Dow Jones U.S. Real Estate index.

AIG, Vonage, Fannie and Freddie….. all were running like they were on steroids.  When there is a flight to junk, the contrarians are usually making their bets to go the other direction.  There are obviously many other inverse and inverse-leveraged ETF and ETN products.  But these have tended to be the most liquid or at least the most active ones.

As a reminder, these leverage and inverse-leverage ETF products often do not mirror their index levels.  But by now, even the pygmies know that.

JON C. OGG
SEPTEMBER 1, 2009