Inverse Index ETFs: Bear With Them in January

Stocks will avoid suffering their worst December since the Great Depression provided that the S&P 500 closes above 2,594.56 Monday. Regardless of whether they do or don't, the issues that have plagued the stock market in the final few months of 2018 – such as the Federal Reserve's handling of interest rates, nervousness surrounding slowing corporate earnings, political divisions in Washington, and unresolved trade tensions between the United States and China – are unlikely to resolve themselves in January.

Fireworks may continue to light up Wall Street in the first week of the new year, with Fed Chair Jerome Powell scheduled to speak at the American Economic Association (AEA) meeting in Atlanta Friday after the release of December's employment report. Further guidance on 2019 interest rate movements or a sharp increase in wage growth that could further crimp company earnings have the potential to move markets.

Later in the month, investors will get a better read on the latter as companies progressively release fourth quarter earnings. "The guidance is going to be crucial," said Quincy Krosby, chief markets strategist at Prudential Financial, Inc. (PRU), when referring to fourth quarter earnings season, per MarketWatch.

Whatever happens, January looks set to offer traders some enticing trading opportunities as the market attempts to navigate through a myriad of unique challenges. As news breaks, traders can use these three leveraged inverse exchange-traded funds (ETFs) to short the market should they find key support levels mentioned below.

Launched in mid-2009, the ProShares UltraPro Short S&P500 ETF (SPXU) aims to provide three times the inverse daily performance of the S&P 500 Index. The benchmark index is a market capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value. SPXU's leverage combined with a razor-thin spread of 0.03% and average daily trading volume (ADTV) of over $300 million make it an ideal instrument to take an aggressive bet against the S&P 500 Index. The fund has $419.28 million in net assets, offers a 1.31% yield and has an expense ratio of 0.91%. It has returned 21.92% over the past month as of Dec. 31, 2018.

SPXU's price broke above a period of six-week consolidation in mid-December – about the same time the 50-day simple moving average (SMA) crossed above the 200-day SMA to provide a "golden cross" signal that suggests further upside momentum. Traders should look to open a long position if price retraces to the initial breakout level at $42 that now acts as support. Consider using the December swing high as a profit target and setting a stop-loss order below the 50-day SMA.

The ProShares UltraPro Short Dow30 ETF (SDOW), created in 2010, seeks to return three times the inverse daily performance of the Dow Jones Industrial Average (DJIA). The DJIA consists of 30 blue-chip U.S. companies, primarily from the industrial and consumer goods sectors, that trade on either the New York Stock Exchange (NYSE) or Nasdaq. SDOW trades nearly 9 million shares per day, which provides ample liquidity for short-term traders. As of Dec. 31, 2018, SDOW, with assets under management (AUM) of $166.12 million and paying a 0.98% dividend yield, is up 19.53% over the past month. The fund charges a 0.95% management fee.

The ETF's chart shows two distinct swing highs in October and November that should provide a vital support area at $18 if price continues to retrace over the next few trading sessions. Traders may want to wait for a price reversal pattern, such as a hammer or bullish engulfing candlestick, to form before going long. Think about placing a stop below the recently formed "golden cross" pattern and booking profits on a run to the Dec. 24 high of $23.90.

With AUM of $581.84 million, the ProShares UltraPro Short QQQ ETF (SQQQ) provides investment results that correspond to three times the inverse daily performance of the Nasdaq 100 Index. The underlying index includes large, actively traded companies that operate in non-financial sectors like technology, biotechnology and health care. SQQQ offers ample liquidity with over 43 million shares changing hands daily and has an average spread of 0.07%. Trading at $17.13, with an expense ratio of 0.95% and offering a 1.29% dividend yield, the fund has returned 13.93% year to date (YTD) as of Dec. 31, 2018.

SQQQ shares accelerated above the $16 resistance level in mid-December as the broader market fell away sharply. The price has recently retraced to test the initial breakout area. A spinning top candlestick pattern printed Friday that shows indecision between the buyers and sellers. Those who wish to trade this ETF should wait for a pullback to the $15 level, where the price finds support from an uptrend line dating back to early October and the 50-day SMA. Consider sitting a stop slightly below the 200-day SMA and banking profits near $21, where the ETF may encounter resistance from the December swing high.