To The Moon

If you have been trading in the market despite the volatility, you would discover that the impact from the latest wave of tariffs (25% on most imports from Mexico and Canada and 10% on Chinese goods) has caused the market to remain unpredictable. These tariffs have officially escalated a global trade war years in the making. While market might look out for negotiations, they have delayed some measures, the broader implications for businesses and markets remain significant. We can see that market did recover briefly from the initial shock but even after it subsides, we cannot deny that markets may be unpredictable, but they present opportunities for those who know how to navigate them. One of the way that I am look is to use Inverse ETFs, it can indeed be used to profit from declining markets, but they come with specific mechanisms and risks that require careful consideration. In this article, I would like to discuss on how it work, when we can use it and I will be sharing on two inverse ETFs, that I think investors can look into. How Inverse ETFs Work Objective: Designed to deliver the opposite of the daily performance of an index or sector (e.g., S&P 500, NASDAQ-100). A -1x ETF gains 1% if the index drops 1% daily. Leveraged Variants: Some offer -2x or -3x daily returns, amplifying gains (and losses) but increasing risk. Key Considerations Daily Reset Mechanism: Returns are calculated daily, leading to compounding effects over time. Volatile markets (up/down swings) can erode returns even if the index trends downward over longer periods. Example: A -1x ETF might lose value if the index drops 10% then rises 10% (net -1% for the index, but ETF also ends down 1%). Volatility Decay: Frequent market reversals can cause the ETF's value to decay due to daily rebalancing. This makes them poorly suited for long-term holds unless the market declines steadily. Costs: Higher expense ratios due to derivatives (futures, swaps) and frequent rebalancing. Potential tax inefficiencies from capital gains distributions. Risk Profile: Leveraged ETFs magnify losses if the market moves against the position. Unlike short selling, losses are capped at the initial investment, but leveraged ETFs can still deplete capital quickly. When to Use Inverse ETFs Short-Term Hedging: Protecting a portfolio during anticipated downturns (e.g., earnings reports, economic events). Speculation: Betting on short-term declines without the complexity of options or margin accounts. Alternatives to Consider Put Options: Provide downside protection with defined risk but require precise timing and expire. Short Selling: Higher risk (unlimited losses) and requires margin accounts. Practical Example If the NASDAQ-100 drops 5% in a day, a -1x ETF gains 5%, while a -3x ETF gains 15%. However, a subsequent 5% rebound erodes gains significantly due to daily resetting. $ProShares UltraPro Short QQQ(SQQQ)$ If we look at how SQQQ have been trading in recent weeks when market experience sell-off and also volatile trading while recovering. RSI have been seen to increase while the market began to experience sell-off last week, and we can see that SQQQ have managed move above the 12-EMA, forming a daily uptrend. Though we are seeing RSI is in zig-zag pattern, this is expected as market remains unpredictable, as there might be more impact coming from President Trump tariffs as countries retaliation might took place over a period. $Direxion Daily Semiconductors Bear 3x Shares(SOXS)$ We are seeing similar trend from SOXS as well as RSI remain near the overbought region signalling buying interest and SOXS have managed to move above the 12-EMA last week when the sell-off started. There have been successful attempt by the SOXS bulls to continue the daily uptrend expansion, and I think we might be seeing more pains coming from the semiconductor space. One of the things is the scrapping of the CHIPS Act, this will end the $52 billion Chips Act Subsidy program, one of the impact would be on those smaller chip makers who might not have the necessary funds to continue or start a new project, we will see more of these impact in weeks to come. $Direxion Daily S&P 500 Bear 3X Shares(SPXS)$ The last time S&P 500 remain above $6,000 was on 21 Feb 2025, since then, S&P 500 have not been able to cross this level ($6K), and we have been seeing market weakness. There have been an increase of interest in SPXS as RSI is trending very close to overbought region and we can see that SPXS is currently well above the 12-EMA level, and I can see that this daily uptrend expansion might continue into mid-March. So I would think that this might last for sometime even though we saw stocks rally on auto tariffs delay, but this might be just temporary. Summary Inverse ETFs are tools for tactical, short-term trading in declining markets. They are not ideal for long-term investing due to volatility decay and daily rebalancing. I would be doing the following to profit from short-term declining market. Monitor positions closely. Understand the impact of compounding. Use them judiciously within a broader risk management strategy. One thing to note is this is more effective for experienced investors with a high-risk tolerance and short-term horizon, but fraught with pitfalls for the uninformed. Appreciate if you could share your thoughts in the comment section whether you think inverse ETFs is a good way to profit from the declining market in the short-term. @TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts. Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.