ETF Strategies: Explanation And Entry Point

Detailed ETF Macro View Highlight (SRS, SIJ, SCC, FXP, EEV, SKF, FAZ)

The theme for 2009 is basically the continuation of the financial and economic collapse of the United States and perhaps the rest of the world. As highlighted in my Weekly Market Analysis section, I believe the worsening collapse would be triggered by the commercial real estate market. We will see malls, offices, apartments and retail shops disappear rapidly. Consumer spending would likely come to a complete halt and hundreds or even thousands of small to medium sized regional banks would disappear. This situation would eventually affect virtually everything in our economy including the shutting down of colleges and universities due to lack of funding and the inability of people getting student loans and eventually possible social riots. All of these possible scenarios will likely be a global phenomenon. However, as investors, we need to observe this situation step by step and take appropriate actions to protect our assets and even be rewarded by our correct macro views.

1. To play the coming commercial real estate market crash, personally I would heavily utilize SRS (SRS) (Proshares UltraShort Real Estate ETF). This ETF delivers twice the inverse of the daily percentage change of the Dow Jones Real Estate Index. The top ten holdings and their percentages within the index are:

Source: (http://www.proshares.com/funds/srs.html?Index)

The top ten holdings represent about 41.46% of the underlying index. All of them have a significant presence within the commercial real estate market either owning stakes in commercial real estate properties or directly managing them.

2. Next, retail shops, restaurants and shopping malls would turn empty and close in huge numbers due to the total collapse of consumer spending. I would personally use SCC (SCC) (Proshares UltraShort Consumer Services ETF). This ETF delivers twice the inverse of the daily percentage change of the Dow Jones Consumer Services Index. The top ten holdings and their percentages within the index are:

Source: (http://www.proshares.com/funds/scc.html?Index)

Virtually all major publicly traded retailers and consumer services based companies will suffer from collapses in earnings. What we saw in 2008 is likely just a serious slow down in consumer spending. After all, we still had trouble finding parking spots in major retail malls. Throughout 2009, I expect that slowdown to turn into somewhat of a complete halt. The top ten holdings of this index represent the best known and some of the largest retailers, drug stores and media companies. They are likely going to face complete collapses in earnings.

3. The next major area of the collapse is going to the industrial sector. Again, in 2008, we saw severe slowdown in global industrial output and demand. That is very different from a collapse. To take advantage of my outlook on the collapse of the industrial sector, I would personally use SIJ (SIJ) (Proshares UltraShort Industrials ETF). This ETF delivers twice the inverse of the daily percentage change of the Dow Jones Industrials Index (^DJI). The top ten holdings and their percentages within the index are:

Source: (http://www.proshares.com/funds/sij.html?Index)

All of the top ten holding companies heavily depend on emerging market growth for their revenues. Unfortunately, emerging markets will no longer be served as alternative revenue sources in 2009. We already see the increasingly weakening Chinese and emerging market economies that cannot be stopped by the emergency and panic stimulus plans issued by the Chinese government and other emerging market governments. This brings us to FXP (FXP) (Proshares UltraShort Xinhua 25 ETF) and EEV (EEV) (Proshares UltraShort Emerging Market ETF). These two ETFs will accomplish the macro view of further weakening and collapse of emerging market economies.

Last, we are back to the financial sector. This sector led the stock market collapse of 2008 and will likely to play a significant role in the further stock market collapse of 2009. We only saw less than 30 regional banks officially closing in 2008. There are many more to come in 2009. The popular SKF (SKF) (Proshares Ultrashort Financials ETF) and the new more aggressive FAZ (FAZ) (Direxion Financials Bear 3X) would help us achieve betting against the financials.

What is a Good Entry Point?

Due to leverage decay, several of the short ETFs in focus actually made their 52-week lows or even all-time lows as of late December. The leveraged ETFs whether long or short can only thrive if the stock market continuously move in a certain direction without extremely high volatility. Unfortunately, the current stock market environment is anything but highly volatile and in many cases it is trading aimlessly in a seesaw fashion. Thus, it is dangerous to hold these leveraged ETFs for a long period of time. To me, the current stock market rally still has some room to go caused by the renewed optimism of the new Obama administration. However, it will not take long until people start to realize that the new administration will not have the ability to change much in terms of the current economic environment. I would start shorting the market when S&P 500 (^GSPC) is close to the 1000 mark, that would be equivalent to 9500 to 9700 on the Dow Jones Industrial average. Currently, we are not quite there yet. More detailed charts will be available soon. Stay tuned.

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Comment by victor

2009-05-27 12:39:18

i will appprieciate if my request is granted

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