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Bond and Inverse ETFs Counter Blah Stocks

Investors turn to TLT, TMF, SSG as market fades


Stocks keep dropping lower due to a repeated refrain — economic slowdown fears and Grecian debt problems. Meanwhile the U.S. government officially hit its statutory debt limit (although the hard deadline isn’t until August) and sexual assault charges were filed against the head of the International Monetary Fund. 

As a result, key technical support levels on the broad market indices were breached as sectors that once looked impervious to the selling pressure, including semiconductors and industrials, turned tail and fell.  They joined the downward move already started by materials, energy, and financial stocks.

All of this means the medium-term downtrend that I warned of in previous posts is set to accelerate. Let’s look at a few charts to illustrate the changes that are afoot as well as a few new exchange-traded fund recommendations.

The Industrials Select SPDR (NYSE: XLI) dropped out of its three-month uptrend pattern as it fell through its 50-day moving average. A similar breakdown occurred back in late February. Industrial stocks tend to move in lockstep with the broad market averages, so if you’re looking to play XLI’s breakdown look at a market index inverse ETF like the ProShares Short Dow 30 (NYSE: DOG).

Semiconductors, one of the most sensitive sectors to the business cycle, dropped hard with the Semiconductor HOLDRs (NYSE: SMH) losing 1.3% on Tuesday. Importantly, shares of the ETF fell out of a consolidation range where it has been stalled since February. Not a good sign. The best way to play this is the ProShares UltraShort Semiconductor (NYSE: SSG), which seeks to return twice the daily inverse of the Dow Jones U.S. Semiconductors Index.

Meanwhile, defensive, non-cyclical stocks continue to out perform the market. This is the rise of the “Grandma stocks” like Procter & Gamble (NYSE: PG) and Pfizer (NYSE: PFE) that are favored by risk-averse investors. You don’t buy a maker of underarm deodorant or erectile dysfunction pills if you’re bulled up on the future of the economy. You buy them when you’re scared and looking for safety.

The same dynamic is helping to push Treasury bonds higher with the iShares Barclays 20+ Year Treasury (NYSE: TLT) jumping 1% as it pushed through its month-long trading range. I recommended T-bond ETFs a few weeks ago as a way to profit from the difficult market environment — and I continue to do so. For those looking for leveraged exposure, the Direxion Daily 30-Year 3X Treasury Bull (NYSE: TMF) still looks good to go.

Disclosure: Anthony has recommended the Direxion 3x Treasury Bull (TMF) to his newsletter subscribers.

Be sure to check out Anthony’s new investment advisory service, The Edge. A two-week free trial has been extended to Investorplace readers. Click the link above to sign up.

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