The S&P 500 Index is now stuck in a bull and bear tug of war. While the benchmark is heading toward a bull market, following a 19.7% rally from the October 2022 lows, traders have raised their bearish bets on the index.
The surge in mega-cap tech stocks, easing inflation, stronger-than-expected corporate earnings and hopes that the Fed is nearing the end of its interest rate-hike cycle is providing a boost to the index. However, data from CFTC’s Commitments of Traders report compiled by Bespoke shows S&P 500 futures are 17.4% short. This is the worst reading since September 2007.
Bulls Are Here!
The six tech stocks — Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL, GOOG), Amazon (AMZN) and Meta Platforms (META) — drove 100% of the rally in the S&P 500. Bank of America strategist Michael Hartnett calls these stocks, including Tesla (TSLA), the “Magnificent Seven.” These stocks have together added $3.35 trillion in market value this year.
Most Wall Street analysts recently raised their target price on the S&P 500 for this year for the second time in many weeks. The equity strategy team at RBC Capital Markets raised its year-end price target on the index to 4,250 from 4,100, while Bank of America gave a call for the S&P 500 to hit 4,300 by the end of the year (read: Analysts Raise S&P 500 Target Price: ETFs to Buy).
Corporate America’s shift of focus to structural benefits, and booming artificial intelligence (AI) will continue to drive the stock market higher. Moreover, an improving earnings picture and hopes of easing policy should also drive the S&P 500 higher. According to CMEGroup's Fedwatch tool, traders have priced in a near 80% chance that the central bank will hold interest rates in the 5-5.25% range in its June meeting.
Further, the percentage of winning stocks on the S&P 500 has increased significantly, with eight out of 11 sectors trading above their 20-day moving average, per Fundstrat's Tom Lee. Six of those sectors have a 20-day moving average that's above the 200-day moving average, another sign that a positive trend is taking shape in the market.
Investors bullish on the S&P 500 could go long on the index through ETFs. ProShares Ultra S&P500 ETF SSO and Direxion Daily S&P 500 Bull 2x Shares SPUU seek to deliver twice (2X) the return of the index. The former is the most popular and liquid ETF in the leveraged space with AUM of $3.6 billion and an average daily volume of around 4 million shares. SPUU is cheaper, charging 60 bps in annual fees against 0.89% annual fees for SSO (see: all the Leveraged Equity ETFs here).
ProShares UltraPro S&P500 ETF UPRO and Direxion Daily S&P 500 Bull 3x Shares SPXL create three times (3X) inverse exposure to the index. UPRO is more liquid, with AUM of $2.4 billion and an average daily volume of 7 million shares. It also charges 2 bps lower fees than the Direxion counterpart.
Bearish Bets Rise
Despite the fact that the S&P 500 is approaching bull market territory, investors are the most bearish in more than a decade. This is especially true as hedge funds and other speculative investors have built up a big bet that the S&P 500 will decline, marking their most bearish positioning since 2007.
Strategists at Morgan Stanley anticipate a sudden pullback in corporate earnings will put brakes on the stock rally. Earnings per share for the S&P 500 are set to drop 16% to $185 this year, according to Morgan Stanley strategists. This is one of the most bearish predictions among those tracked by Bloomberg, and contrasts with forecasts of mild growth from the likes of Goldman Sachs.
The stock rally is dominated by the big tech and AI hype. When any of these stocks falter, the S&P 500 will decline, given its heavy weight to these stocks. Additionally, the slew of recent bank failures has tightened credit, which is expected to slow growth as higher borrowing costs temper consumer spending (read: Will S&P 500 ETFs to Slump Ahead Except the Super Seven?).
Investors who believe the Bespoke data and Morgan Stanley could go short on the index with the help of inverse or leveraged inverse ETFs that offer inverse (opposite) exposure to the index. ProShares Short S&P500 ETF SH, Direxion Daily S&P 500 Bear 1X Shares SPDN, ProShares UltraShort S&P500 ETF SDS, ProShares UltraPro Short S&P500 SPXU and Direxion Daily S&P 500 Bear 3x Shares SPXS are currently the available choices.
SH and SPDN provide unleveraged inverse exposure to the daily performance of the S&P 500 Index. While the former is the most popular and liquid ETF in the inverse equity space, with AUM of $2.3 billion and an average daily volume of 23 million shares, the latter has a lower expense ratio of 0.45%, almost half of ProShares product.
SDS seeks two times leveraged inverse exposure to the index, charging 90 bps in fees. It is also relatively popular and liquid, having amassed nearly $1.1 billion in AUM and nearly 5 million shares in average daily volume.
SPXU and SPXS provide three times inverse exposure to the index but the former charges 5 bps lower than SPXS. Both ETFs trade in a solid average daily volume of 21 million and 23 million shares, respectively. SPXU has AUM of $1.4 billion and SPXS has amassed $956.9 million in its asset base.
Suitable Only for Short-Term Traders
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Due to their compounding effect, investors can enjoy higher returns in a short period, provided the trend remains a friend. Their performance could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as weeks or months).
Further, liquidity can be a big problem as it can make the products more expensive than they appear.
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