Direxion Daily Healthcare Bull 3x Shares: The CURE / S&P 500 Divergence Is A Tell

The expression “timing is every little thing” takes on an additional stage of urgency and paranoia relating to buying and selling 3x leveraged ETFs. The incorrect week is the distinction between ecstasy and perdition.

Even the act of holding them too lengthy is, in itself, harmful. Leveraged ETFs are identified for his or her pure decay. Resulting from a multi-day monitoring inefficiency known as “beta slippage,” their worth tends to say no and can lead to losses even when their underlying index is favorable.

Nonetheless, for these swing merchants who know the hazards and may calmly assess the worth motion by way of technical evaluation, a extremely leveraged ETF can present the right tactical device.

Direxion Every day Healthcare Bull 3x Shares (NYSEARCA:CURE) tracks the composition and exercise of the Well being Care Choose Sector Index, a core combination of mega-cap corporations engaged in varied elements of that broad business.

CURE’s intention as a leveraged fund is to supply 3 times the efficiency of the benchmark index – particularly, reaching a magnified return on a single-day foundation and never on a cumulative foundation. It does this utilizing derivatives and debt devices. Along with equities and money reserves, 8.5% of its complete holdings is an index swap (a hedging contract wherein a celebration exchanges a predetermined money circulate with a counterparty on a specified date predicated on the index). When it comes to its equities, the fund’s largest single inventory holding is in United Healthcare, with 7.21% of the funding. The second-largest funding with 6.55% is JNJ. Merck holds third rank with a 4.28% share.

Wanting on the fund’s fundamental stats: CURE is a passive ETF with a excessive expense ratio of .97 and small quarterly dividend of .41%. What makes this fund distinct after all is that it’s a 3x leveraged passive fund: this may be seen within the ETF’s excessive beta of two.13 and its alpha of 5.53.

Launched by Direxion Investments in June 2011, CURE has an extended observe document for a leveraged ETF. Although that is uncommon in itself, what makes CURE actually distinctive is its long run efficiency. It places up very spectacular returns for a brief term-y, tactical, leveraged ETF:

It clearly stomps the S&P 500 in efficiency over the previous ten years. Discover simply how nice the cumulative 3 yr, 5 yr, and 10 yr returns are compared to the S&P 500. Why? Healthcare on common merely has extra up days than different sectors (that are usually extra cyclical) and since the market legs in most dramatically when it anticipates an approaching bear.

Since January 1, 2023, nevertheless, we are able to see a distinct relationship of the ETF with the S&P 500. Most frequently these two are positively correlated, however currently they’ve diverged in a dramatic approach:

CURE is down -9.19% vis-à-vis an S&P 500 that’s up 6.67%.

Wanting again over the course of the previous 13 years, I might solely discover one different interval the place there may be this a lot divergence. That timeframe was in early 2021 – particularly 38 days from late January 25, 2021 to March 4, 2021:

This was a frothy, topping interval when, say, X Social Media ETF was up 14% or NVIDIA was up 12% by February 15 inside a six-week interval.

The CURE / S&P 500 divergence thus arguably turns into a “inform” that S&P500 has been operating so sizzling with its extra speculative sectors for the previous month and half that the index might nonetheless cloak the drop from such big healthcare megacaps.

We would have simply skilled an analogous interval from January to mid-February 2023, with speculative risk-on trades outstripping the extra defensive sectors. What’s vital to acknowledge, nevertheless, is that when the pattern shifts, it often pivots arduous in the other way.

For instance: after this anomalous 2021 divergence, the subsequent six weeks supplied CURE traders a pronounced bounce – up 39.50%!

One of many crucial insights of the MACD, is to see whether or not the worth motion is confirmed or not by the underlying MACD. On this case, wanting on the two-year weekly chart, there’s a sturdy argument that CURE’s MACD indicator topped out August 30, 2021 with the 2 later value highs of December 27, 2021 and April 4, 2022 not being confirmed by its MACD. As a substitute, the MACD falls low in swings and in the end places in a “backside” on September 26, 2022:

After this top-to-bottom MACD swing over a 13-month interval, we then see a value surge to early December 2022 to be adopted by the current low vol/ tight-banded drift down.

What’s vital at present is that we’re seeing a “larger low” confirmed within the MACD, notably as we see the sluggish stochastic in oversold situation.

An argument might be made that — barring exogenous occasions — the market will probably be returning to a extra risk-off, defensive posture for the subsequent six weeks, and it will result in outperformance for CURE (and huge cap healthcare extra usually) vis-à-vis the S&P 500.

Merchants lightened up on defensive 2022 healthcare winners (like LLY) this January, however they could tack again as incomes season ends, they usually take earnings of their speculative performs.

As of February 18, the Healthcare Choose Sector SPDR Fund (XLV) is now down 8 weeks in a row — a brand new document. CURE affords a technique to play this traditional “imply regression” commerce.

Conclusion

Regardless of this technical setup, keep in mind the dangers of leveraged ETFs like CURE. 3x leveraged funds are probably the most harmful of all speculative trades as a result of they make the most of monumental leverage of their try to attain larger returns (and even have an added layer of counterparty threat.)

A leveraged ETF like CURE resets to its underlying benchmark index every day to keep up a hard and fast leverage ratio. That’s not in any respect how your typical margin account operates. This reassignment course of creates a relentless leverage lure. Given an unmitigated downtown, an fairness value may decline sufficient in in the future to wipe out extremely leveraged traders. As one investor web site affords one prime instance:

The Dow Jones, one of the secure inventory indexes on the planet, dropped about 22% on in the future in October of 1987. If a 3x Dow ETF had existed then, it will have misplaced about two-thirds of its worth on Black Monday.

Traders face substantial dangers with all leveraged funding automobiles — together with the chance of being worn out. Buying and selling the XLV or IYH affords a far safer method to the current divergence between healthcare and the S&P.