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Believe in George Soros? Short S&P 500 with These ETFs

Zacks Equity Research

Stocks have seen an impressive start to Q3 as key U.S. indices are not tired of hitting highs every now and then. With July spreading cheers among equity investors, equity bulls are flexing their muscles in August too. 

To start this week, the indices one again hit fresh-highs as U.S. retail sales and wholesale prices did not come in too upbeat and subsequently lowered the chances of a near-term Fed rate hike. This also ensures the continuation of cheap dollar inflows, keeping the stock party going (read: Should You Buy Retail ETFs Now?).

Investors should also note that better earnings from banks, tech giants and even from the retail sector and hints of oil price recovery also played their roles in driving stocks higher. But it seems to be low Treasury bond yields which are actually jazzing up stocks (read: Oil ETFs Soar on Positive News: Will the Rally Last?)

Notably, the yield on the benchmark 10-year U.S. Treasury notes was 1.57% on August 16, 2016, well below 2.24% seen at the start of the year. Meanwhile, the S&P 500-based ETF SPY added 4.6%, Dow Jones Industrial Average-based ETF DIA advanced 4.2% and Nasdaq 100-based fund QQQ rose 9.5% in the quarter-to-date frame (as of August 15, 2016).

But Is All Well with the Market?

This ascent came despite a whirlpool of worries loitering around – especially the yet-to-be-seen impact of Brexit, global macroeconomic doldrums especially in Europe and Japan, continued uncertainties in the oil patch and the key emerging market China.

Overvaluation concerns raised by many analysts plus the Fed itself also has the potential to derail this rally. If these were not enough, New York Fed President William Dudley hinted at the possibility of a September hike.

Added to this, the announced value of stock repurchases by U.S. companies has slackened to a four-year low as noted by TrimTabs Investment Research. Since stock buyback lessens the number of shares outstanding, it in turn pushes up earnings per share and acts as a tailwind for market movement. So this slowdown in activity could spell trouble for the future rally.

George Soros Warns on S&P 500

Billionaire investor George Soros recently joined the group which has been vocal against the longevity of the S&P 500 rally. The investing guru recently “almost doubled down on a bearish bet against the U.S. stock market.”

In a recent 13F filing, Soros Fund Management indicated that it owns put options on more than 4 million shares of the SPY as of June 30. With this, “puts” rose about 90% as of March 31. Put options offer the buyer the right to sell a stock at a specified price within a specified time, indicating a bearish outlook on the S&P 500.

Prior to him, Goldman Sachs lowered the outlook on equities to 'underweight' for three months and held a ‘neutral’ outlook for a one-year frame. Deutsche Bank's David Bianco also cautioned that “the next move for the S&P 500 is a 5% to 9% decline ahead of the election.” Jeffrey Gundlach, the chief executive of DoubleLine Capital also did not seem convinced about the stock valuation as U.S. economic growth is still tepid and corporate earnings are far from steady (read: S&P 500 to Dive Ahead? Short with These 5 ETFs).

How to Profit if Soros Proves Right About S&P 500?

Investors can play this warning by shorting the S&P 500 index and investing in inverse ETFs including ProShares Short S&P500 ETF SH, Direxion Daily S&P 500 Bear 1x Shares ETF SPDN, ProShares UltraShort S&P500 ETF SDS, ProShares UltraPro Short S&P500 SPXU and Direxion Daily S&P 500 Bear 3x Shares SPXS.

Bottom Line

As a word of caution, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis. Still, for ETF investors who are bearish on the equity market for the near term, either of the above products could make an intriguing choice (see: all the Inverse Equity ETFs here).

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SPDR-DJ IND AVG (DIA): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
NASDAQ-100 SHRS (QQQ): ETF Research Reports
 
PRO-ULSH S&P500 (SDS): ETF Research Reports
 
PRO-SHRT S&P500 (SH): ETF Research Reports
 
PRO-ULT SH S&P5 (SPXU): ETF Research Reports
 
DIRX-LC BEAR 3X (SPXS): ETF Research Reports
 
DIR-D SP5 BR (SPDN): ETF Research Reports
 
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