U.S. Markets open in 4 hrs 28 mins

Tired of Caution? Here is A Bullish Case of S&P 500 ETF Investing

Sanghamitra Saha

In the last few months, all that we heard was warnings about the impending crash in the S&P 500 index. Be it Goldman Sachs, HSBC, billionaire investor George Soros or Deutsche Bank's David Bianco – many have raised the yellow flag in front of S&P 500 investing time to time (read: Believe in George Soros? Short S&P 500 with These ETFs).

Everyone had their share of reasons. After all, stocks saw an astounding start to Q3 despite Brexit, still-soft corporate earnings, weaker business investments in the U.S. and global growth issues. Especially, Goldman Sachs has long been vocal on this issue.

Most recently, the research house indicated that investor enthusiasm has now peaked and “points to a 2 percent near-term S&P 500 fall." The sentiment indicator, which looks to track the S&P 500 futures positioning, now stands at its maximum level of 100 and thus is due for a reversal (read: ETF Strategies for Q4).

Goldman also believes that corporate buybacks — one of the main factors in pushing up the stocks – will slow down in the second half of 2016, causing an upheaval in the market and expects the S&P 500 to slip by about 2% by December. On the other hand, HSBC technician sees “the possibility of a severe fall in the stock market is now very high.” They have all repeatedly cautioned about overvaluation in the market (read: Play These Inverse ETFs if You Hate This Bull Market).

Against such a scenario, one strategist Tom Lee reasons out why the S&P 500 may close out the year with a double-digit return. His target for the S&P 500 is 2,325, up 8.7% from the close on October 26, 2016.

Bullish Arguments for S&P 500 Further Rally

According to the strategist, “the stock market and the high-yield market almost always move in sync," and "the high-yield market is up 18 percent this year.” He also went on to explain that "the S&P, any time the high-yield market has been up 10 percent, has averaged a 22 percent gain.” Since the index is now up about 4.7%, it has further room to run going by history.

On the earnings front, Lee indicated that “it's been actually one of the better earnings seasons.” On this front, we would like to note that Q3 earnings season is on its way to deliver positive earnings growth for the first time in six quarters.

As per the Earnings Trends report issued on October 26, 2016, earnings growth of the S&P 500 in Q3 is expected to be 1.4% on 1.4% higher revenues. Earnings growth momentum would pick up with 4.9% growth expected in Q4, 11.2% in Q1 of 2017 and 10% in Q2 of 2017. Revenue growth for Q4 of 2016, Q1 of 2017 and Q2 of 2017 are expected at 4.6%, 7.1% and 6.1%, respectively.

If this is not enough, expected strong sales in the upcoming holidays and the Halloween Effect may also contribute to the rally. The Halloween Effect means buying stocks six trading days before Halloween and selling on May 1. Historically, this period has brought bountiful returns for the stock market.

So, if you want to go against the tide and cash in on the above-said arguments, you can play the below-mentioned ETFs.

There are several regular S&P 500 ETFs including SPDR S&P 500 ETF SPY, iShares Core S&P 500 ETF IVV and Vanguard 500 ETF VOO. There are leveraged ETFs too. These are Ultra S&P500 ETF SSO, UltraPro S&P 500 ETF UPRO and Direxion Daily S&P 500 Bull 3x Shares ETF SPXL (read: Will New SEC Rules Hurt Triple Leveraged ETFs?).

SSO gives twice the daily performance of the S&P 500 while UPRO and SPXL deliver triple the daily performance of the S&P 500 (see all leveraged ETFs here).

Bottom Line

As a caveat, investors should note that leveraged products are risky in nature and suitable only for short-term traders. Plus, election uncertainty is looming large in this fourth quarter, which may foil the usual wining trend (read: 5 ETFs to Buy as Election Uncertainty Looms).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
DIRX-LC BULL 3X (SPXL): ETF Research Reports
 
PRO-ULTR S&P500 (SSO): ETF Research Reports
 
PRO-ULT S&P500 (UPRO): ETF Research Reports
 
VANGD-SP5 ETF (VOO): ETF Research Reports
 
ISHARS-SP500 (IVV): ETF Research Reports
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report