Why The S&P 500 Was Our Focus In This Last Rally

It’s a brand new year but it seems we are back to some of our old sector rotation woes to start. Currently the S&P 500 is looking stronger than the Nasdaq composite and by using a leveraged position for SPY stock we took advantage of the latest rally. Here was an early clue for our choice for swing trading exposure.

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Why We Use Leveraged Market ETFs For Exposure

It wasn’t an easy year for investing in 2021 and it didn’t get any easier in the final quarter. Our exposure level was pretty low on SwingTrader through a lot of the quarter. With low exposure, however, you risk underperformance if the market rallies. That’s where we often supplement with an index ETF, often a leveraged one.

Among them: ProShares Ultra S&P 500 ETF (SSO) or ProShares Ultra QQQ (QLD). These ETFs strive to double the daily price moves of the S&P 500 or Nasdaq 100, respectively. The leverage gives the position a little more juice than a regular SPDR S&P 500 (SPY) or Invesco QQQ Trust (QQQ) position. We’ll focus on our recent SSO position in this column. It basically has the same action as SPY stock on a short-term basis, just doubled.

What Early Clue Showed SPY Stock Strength?

Just after the Thanksgiving holiday, news of the omicron variant put the market on notice (1). It was the first breach of the 21-day line for the S&P 500 since the Oct. 14 follow-through day.

Things continued lower and bottomed out on Dec. 3 just below the 50-day line (2). The rally was short-lived but the pullback gave an important clue as to where the strength was in the market.

On Dec. 20, SPY stock broke below its 50-day line (3) but was still comfortably above its prior low. The Nasdaq, by contrast, briefly undercut its prior low the same day. Why is this important? It shows relative strength and resistance by SPY to a move lower.

Handling Our SSO Position

At the Dec. 20 low, our exposure on SwingTrader was down below 10%. So when we saw a bounce the next day (4), we needed to increase exposure so we weren’t completely left behind. Since SPY stock is where the strength was, we went with the leveraged ETF as a quick way to participate.

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SPY stock broke out into new highs on Dec. 27 and we took our first profit in SSO with over a 5% gain (5). From there, it tightened up and even the brief close below the 5-day moving average line (6) retained the bulk of the gains from the Dec. 27 strength.

As the new year started (7), SPY stock briefly undercut the prior trading day’s low and bounced up strongly. It looked like a promising start to the new year.

Don’t Fight The Fed

But that changed on the release of the Fed minutes. The hawkish tone led to selling and SPY stock broke below the lows of its tight trading. Our SSO position was below our first level of profit taking and we removed the rest of the position at 145 before it got worse (8).

While SPY stock is holding at its 50-day line, it still looks vulnerable. The Nasdaq composite even more so. Without the strength of Jan. 3, it would resemble a vertical violation. That kind of action usually precedes a stock market correction and still may happen for the index.

As for our swing trading, locking in the gains and being on the right side of rotation has given us an edge this first week of the year.

More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.

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