Daily Gains Letter

Time to Start Thinking Like a Bear?

By for Daily Gains Letter | Apr 16, 2013

















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The Dow Jones Industrial Average and the S&P 500 have both been on herculean rolls, hitting new high after new high, in spite of the underlying economic indicators. While the Dow Jones is reaching for the stars near 14,825 and the S&P 500 is running in step at 1,585, the corporate numbers don’t seem to add up.

Despite the euphoria, the International Monetary Fund (IMF) is expected to cut its estimate for U.S. gross domestic product (GDP) growth in 2013 to 1.7% from the previously forecasted two percent. Global growth was also revised downward to 3.4% for 2013, compared to the original 3.5% estimate. (Source: York, P., “IMF leak points to cut in growth forecasts,” IFA Magazine April 12, 2013.)

U.S. consumers, the nation’s economic engine, are becoming increasingly pessimistic about the country’s outlook. Consumer confidence fell from 78.6 in March to 72.3 in April—its lowest level since July 2012. Economists were expecting consumer confidence to increase to 79.0, suggesting Wall Street is a little out of touch with how the average American is faring. (Source: Smialek, J., “Consumer Sentiment in U.S. Declines to a Nine-Month Low,” Bloomberg, April 12, 2013.)

Not surprisingly, U.S. retail sales also fell 0.4% in March, the second decline in three months and the largest drop in nine months. Once again, economists missed the mark, expecting sales to be flat. Americans cinched their pockets tighter at gas stations, department stores, and electronics and appliance retailers. Auto sales also dropped. (Source: Kowalski, A., “Retail Sales in U.S. Decline by Most in Nine Months,” Bloomberg, April 13, 2013.)

Economists may be calling for an indefinite number of blue skies, but S&P 500 corporations are a little wary.

April marks the start of first-quarter earnings season, and things are not looking rosy. Of the companies on the S&P 500, 78% have issued negative earnings-per-share (EPS) guidance—significantly above the five-year average of 61%. If the overall number is negative, it will mark the second time in the past three quarters that the index has reported a year-over-year decline in EPS. More specifically, four of the 10 sectors are expecting to report a first-quarter earnings decrease. (Source: “Does Alcoa set the tone for Earnings Season?,” FactSet, April 5, 2013.)

While investors are shrugging off the negative numbers, the S&P corporations aren’t. Overall, 86 companies have issued negative EPS guidance, while 24 companies have issued positive EPS guidance. Negative outlooks are outpacing the positive outlooks at a ratio of 3.58:1—the highest negative outlook ratio in seven years.

Where should investors looking to increase their retirement portfolio turn to in these economically challenged topsy-turvy times? One of the best ways to beat a bear market is with a bear market exchange-traded fund (ETF).

The ProShares UltraPro Short S&P500 (NYSEArca/SPXU) seeks a return that corresponds to three-times the inverse (-3x) of the daily performance of the S&P 500. With the S&P 500 trading at record highs, it shouldn’t be a surprise to see this ETF trading at record lows.

The ProShares UltraShort Dow30 (NYSEArca/DXD) seeks daily investment results that correspond to two-times the inverse (-2x) of the daily performance of the Dow Jones Industrial Average.

We all know the markets go through regular cycles—they grow and retrace. Historically, the U.S. experiences an economic slowdown every four to six years. The current bull market is now in its fifth year. With Wall Street looking increasingly fragile, it’s important to remember that with the economic ebb and flows, the markets have never failed to rebound.

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