I was watching the mighty Baltimore Ravens take apart a strong contender from Los Angeles last night in a game of American football. It was brother against brother as a Harbaugh coaches both teams. This was the third time that John had defeated Jim in a head-to-head competition.
As we were watching my stepson, a young man of 22 asked me why he shouldn’t just buy a leveraged ETF instead of the S&P500 ETF (SPY). And you know. That’s a good question.
If you had bought SPXL (a 3x leveraged S&P 500 ETF) ten years ago, you would have made 700% on your money instead of 180% by just owning the unleveraged SPY (gold line).
This simple logic is why retail investors are heading to single-stock leveraged ETFs in record numbers. These now trade more than $80 billion a week. After all, if stocks never go down you can make twice your money or even more.
What retail investors don’t remember is that period of 2021/2022 where the SPXL went from around $150 per share to $50 per share. You need a strong stomach to watch your nest egg drop by two-thirds in six months and still hang on tight.
Look again at that yellow chart above. At the bottom is the moving average convergent-divergent (MACD) indicator – the red and blue lines on the bottom. If the lines are above the zero line and the two lines cross, that is a sell signal. The opposite is also true. If the lines cross below the zero line it is a buy signal. The farther away from the zero line the more powerful the move.
The MACD is a lagging indicator. It won’t call the exact top or bottom but it will confirm a trend. It might not be a top yet but it is looking toppy. It sure as heck ain’t a bottom.
Here is another contrarian indicator. Individual investors are the least worried about stocks since 2007 – right before the big crash.
But if you want to ride the wave into leveraged stocks I suggest the 5x leveraged Magnificant Seven ETF (MAG7: trades in the UK). This will get you exposure to five times the top 7 stocks on the market. And given the Mag7 is weighted by the S&P 500 as 32% of the index and that is where all the growth is coming from, why carry around the 493 other loser stocks?
Here is the 5x Mag7 chart. The MACD says it is a sell anyway. You might want to wait for a formation like we saw in August before putting new money to work.
All the best,
Christian DeHaemer
Outsider Club
Trumpy Trades: https://www.outsiderclub.com/top-trump-trade/
Called the Top in MSTR: https://www.outsiderclub.com/nailed-it/
Bitcoin Fade: https://www.outsiderclub.com/too-late-for-bitcoin/
