XXXX: Near-Term Bearish S&P 500 Clues, Avoid Right Now

seekingalpha02-09

The S&P 500 tends to struggle from mid-February through mid-March, making it a tough seasonal stretch for leveraged ETPs.The MAX S&P 500 4X Leveraged ETN has seen strong performance but carries risks ...

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The chart below illustrates that the US large-cap index tends to struggle from mid-February through mid-March, even during typically strong election years. That's a very short-term outlook, and it might not be too applicable for long-term investors. But for those trading leveraged exchange-traded products (ETPs), including exchange-traded notes (ETNs), keeping a close watch on when seasonal moves become pronounced is critical. I have a sell rating on the MAX S&P 500 4X Leveraged ETN (NYSEARCA:XXXX). The product has been a tear since it launched late last year. The S&P 500's strong run from before the December Fed meeting through the first half of the fourth quarter earnings season has helped send the leveraged product higher by 37% in barely more than two months. A Tough Seasonal Stretch Ahead? Grant Hawkridge, All Star Charts For background, the return on XXXX is linked to a four times leveraged participation in the daily performance of the S&P 500 Total Return Index, minus applicable fees and charges. The ETNs are not \"buy and hold\" investments and should not be expected to provide a four times leveraged return of the underlying index's cumulative return for periods greater than a day, according to the issuer. The ETN has a high 0.95% annual expense ratio and there is a daily financing rate the issuer pays given the leverage employed (per the Fact Sheet: The most recent bank prime loan rate published by the Board of Governors of the Federal Reserve System plus the Financing Spread of 2.00% per annum, accrued on a daily basis). XXXX ETN Details MAX As I always like to preface with leveraged ETPs, they are generally riskier than traditional ETPs which do not employ leverage. What's more, ETNs have an added layer of risk as they are considered debt obligations of the issuer. ETFs, on the other hand, are backed by assets. With XXXX, there is the risk that if the issuer faces financial turmoil, then repayment to the ETN holders could come into jeopardy. As for the leverage feature, I am sure to point out how daily compounding returns work since it can be a major risk for investors holding a product like XXXX beyond a day. Here is an illustration of how negative compounding returns occur in a leveraged ETN: Suppose an index starts at 100, and the leveraged product also begins at 100. If the index rises by 10% to 110, the 4x long product increases to 140. However, if a subsequent 10% drop happens, the index falls to 99 (a 1% loss from the initial value). In contrast, the 4x long product declines to $84 (0.6 x 140), reflecting a 16% total decrease. Additional disclosures on leveraged products are provided at the end of the article. As MAX states: \"The leverage is reset daily, the return on the 4x ETNs is path dependent, and you will be exposed to compounding of daily returns. As a result, the performance of the 4x ETNs for periods greater than one Index Business Day may be either greater than or less than four times the Index performance, before accounting for the Daily Investor Fee, the Daily Financing Charge and any Redemption Fee Amount.\" In general, when volatility increases without a definitive price trend, the leverage hurts the ETP's value. Another risk I found when analyzing the ETN: MAX may choose to redeem the 4x ETNs at any time, and the Call Settlement Amount may be less than the principal amount. This presents a potential conflict of interest between investor and issuer goals in determining whether to call the ETNs. Finally, XXXX does not pay interest, and investors have no ownership rights in Index constituents, including dividends or distributions, except as reflected in the Index level. While the S&P 500 currently trades at a high 20x forward operating price-to-earnings ratio, the P/E is essentially irrelevant for something like XXXX. Time horizons under a year should focus less on valuation and more on technical, momentum, and seasonality factors. S&P 500 P/E Valuation is High Above 20x, But That Should Only be a Factor for Longer-Term Investors Yardeni Research SPY Seasonality: The Back Half of February through Mid-March Can be Dicey Seeking Alpha The Technical Take Now, where might XXXX pull back to? We must look at the underlying index. In this case, I inspected the SPDR S&P 500 Trust ETF (SPY) chart. Notice in the graph below that as the S&P 500 Index knocks on the door of 5000, SPY may have the potential to pull back to its previous all-time highs near $480. That would be a less than 5% dip in the SPX but could be a considerable move lower in the 4X ETP, perhaps upwards of 20% given the leverage amount. Also, take a look at the RSI momentum oscillator at the top of the graph - it is printing a bearish negative divergence. Within the index itself, fewer stocks are participating in the upside. Combine the bearish RSI move with weak internals, and the near-term outlook has turned less sanguine, in my view. Throw in the bearish seasonality factor, and a correction could be in the works, which would greatly harm the value of XXXX. Finally, it would make psychological sense for the S&P 500 to pause before climbing above a key round number like 5000. Overall, selling XXXX here in anticipation of a market pullback appears as a favorable risk/reward idea in my view. S&P 500 ETF: Eyeing A Retest of the Prior High, Bearish RSI Divergence Stockcharts.com The Bottom Line I have a near-term sell rating on XXXX. I assert that investors should only hold an ETN like XXXX for a very short time period due to the potentially harmful effects of negative compounding returns. With some bearish seasonality at hand and emerging near-term bearish risks technically with the S&P 500, I have a sell rating on XXXX. Additional disclosures: 1) The Lowdown on Leveraged and Inverse Exchange-Traded Products (FINRA) 2) Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors (SEC)  3) FINRA's Reminder on sales practices for Leveraged and Inverse ETFs (FINRA)","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2410708679"}