Bearish ETFs and the US Markets

The current three-month rally may have run out of steam as the Dow suffered a triple-digit decline yesterday, shedding 200.72 points or 2.35% to close at 8339.01. The Dow has closed with triple-digit losses three times so far in the past three weeks, and 31 times so far in 2009. This compares to 504 triple-digit in history, 84 of which occurred in 2008 including the largest 1-day point decline in history of 777.68 points or 6.97% on September 29.

Monday’s broad selling session also led the Dow, S&P , and Nasdaq Composite in negative territory for the month, all down 1.9%, 2.84% and 0.46% respectively month to date, as all three indexes are poised to halt a 3-month winning streak. With the equity markets so depressed, ETF vehicles betting against the Indexes have gained in the past three weeks. Inverse exchange traded funds (ETF) which return the inverse movement of an index such as the Proshares Short Dow 30 (DOG) has seen significant gains as investors are worried about lower expectations for a global economic recovery.

ProShares Short Dow 30 (DOG) has gained 4.8% in the past three weeks, and traded cents away from its 50-day moving average on Monday. Proshares Ultra Short Basic Material (SMN) which invests in the inverse performance of the Dow U.S. Basic Material Index has had one of the best runs amongst inverse ETFs as it closed above its 50-day moving average on Monday at 21.35, and has increased 28.2% in the past 3-weeks or from its 6/5 close of 17.45. The components of the Dow Basic Material Index include companies that are involved in production of aluminum, chemicals, metals, and paper products such as Cabot Corp. (CBT)and Arch Coal (ACI) which happen to be significantly down more than 21% each as of month to date. (See chart below for additional inverse ETF’s performance in the past three weeks).