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TECS: Bond/Equity Disconnect Widening, With Tech Overpriced

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Thesis

The Direxion Technology Bear 3x Shares (NYSEARCA:TECS) is an ETF falling successful nan leveraged costs category. The conveyance seeks regular finance results 300% of nan inverse capacity of nan Technology Select Sector Index. When the scale sells-off importantly for illustration successful 2022, TECS provides for outsized gains. We are of nan sentiment that leveraged costs for illustration TECS should beryllium utilized arsenic trading instruments alternatively than bargain and clasp vehicles, pinch chopped holding periods and targets successful mind. Please beryllium alert of nan FINRA regulatory framework astir leveraged products for illustration TECS:

While specified products whitethorn beryllium useful successful immoderate blase trading strategies, they are highly analyzable financial instruments that are typically designed to execute their stated objectives connected a regular basis. Due to nan effects of compounding, their capacity complete longer periods of clip tin disagree importantly from their stated regular objective. Therefore, inverse and leveraged ETFs that are reset regular typically are unsuitable for unit investors who scheme to clasp them for longer than 1 trading session, peculiarly successful volatile markets.

Source: FINRA

We position TECS arsenic an businesslike superior allocation instrumentality for investors that person sectoral views for defined periods of time. For example, a unit investor constrained by their brokerage equilibrium but pinch a bearish tech position astatine nan opening of 2022 could person utilized TECS to summation nan vulnerability connected $300 worthy of superior by investing only $100.

A unit investor however, needs to beryllium alert of nan leverage decay, meaning that complete agelong periods of clip leveraged ETF's results are negatively affected by their build. These instruments are only meant to replicate nan underlying scale connected a 1-day clip horizon.

With ostentation very sticky and nan labour marketplace strong, nan Fed Funds curve has been re-priced importantly successful nan past weeks:

curves

Fed Funds Curves (Bloomberg)

We tin spot a monolithic displacement up successful nan implied argumentation rate, pinch nan terminal complaint now complete 5.2%. This level mightiness spell moreover higher, limited connected incoming data. What does higher rates for longer construe into? Well consequence free rates are nan ones utilized to discount early profits, truthful companies who are not presently profitable but are expected to make profits successful nan distant early should beryllium impacted nan most. However, location is simply a glaring disconnect starting to hap betwixt nan enslaved marketplace and nan equity market:

stocks

Stocks vs Equity (Bloomberg)

As rates pushed higher connected nan backmost of incoming information and nan Fed speak, stocks continued their upwards trajectory, pushing valuations higher alternatively than lower. That is not only puzzling, but besides unsustainable. There is simply a beardown historical relationship betwixt rates and equities, and it will mean revert. The astir delicate ones to rates for longer, i.e. tech will consciousness nan brunt of nan pain, particularly aft nan mind bogging rally successful nan past months:

tech

Tech Sector Performance (S&P)

What is absorbing astir TECS is nan truth that it provides for a existent hedge. Buying puts has not really worked during this carnivore market, pinch VIX making little lows connected nan backmost of monolithic amounts of trading successful zero-day options (0DTE):

vix

VIX Performance (Google)

Have we seen this movie before?

Indeed we person seen this image before. The first clip we covered TECS was successful August 2022 erstwhile we were reasoning that nan carnivore marketplace rally witnessed was coming to an end. We do not person a crystal ball, but our article came retired connected August 2, 2022 pinch nan marketplace soon taking a chemoreceptor dive. Nobody tin clip nan market, but indicators that are stretched thin to mean revert. The respective waste and acquisition made over 56% successful gains. We are seeing a akin set-up here, wherever each indicators for nan existent equities rally are over-stretched and it conscionable does not make consciousness to spot specified a disconnect betwixt bonds and equities.

Conclusion

TECS is simply a leveraged ETF. The conveyance seeks regular finance results 300% of nan inverse capacity of nan Technology Select Sector Index. When Tech equities spell down successful value, TECS moves up. The rates marketplace has re-priced nan Fed Funds curve higher successful nan past weeks, but contrary to expectations, stocks person defied that move, staying higher. There is now a monolithic disconnect betwixt nan enslaved marketplace and nan equity market, which we consciousness will mean revert. With overstretched indicators and monolithic twelvemonth to day gains, tech stocks punctual america of nan aforesaid set-up arsenic August 2022. For unit investors looking to hedge their portfolios, TECS ETF could beryllium a very bully choice, pinch a patient holding play successful mind and pre-defined introduction and exit points.

This article was written by

Binary Tree Analytics floor plan picture

With a financial services rate and derivatives trading background, Binary Tree Analytics intends to supply transparency and analytics successful respect to superior markets instruments and trades._____________________________http://www.BinaryTreeAnalytics.com

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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