“There are two seasonal short trades that typically begin in June. Banking and Natural Gas have a seasonal tendency to peak in the second month of the ‘Worst Six Months.’ Seasonal weakness has proven to be consistent over the past five-, 10- and 15-year time periods, with average declines ranging from 5.9% to 11.0% for both sectors over the three time periods.
“Within these two sectors there are numerous choices available to take advantage of weakness by going long an inverse (and/or inverse leveraged) ETF. ProShares Short Financials (SEF), ProShares UltraShort Financials (SKF) or Direxion Daily Financial Bear 3X (FAZ) are three possible funds to trade Banking sector weakness. Natural Gas weakness can be traded using Direxion Daily Nat Gas Related Bear 3X (GASX), ProShares Short Oil & Gas (DDG) or ProShares UltraShort Oil & Gas (DUG).
“Of this basket, Direxion Daily Financial Bear 3X (FAZ) is the most liquid Bank sector fund, trading greater than 15 million shares per day on average over the past three months. DUG is the second most liquid, but its exposure to oil is not desirable, as Mideast unrest could flare up at any moment, causing crude oil’s price to spike. Therefore, Direxion Daily Natural Gas Related Bear 3X (GASX) is the next-best alternative to take advantage of natural gas sector weakness.
“Although these seasonalities do not begin for another month, FAZ and GASX are up sharply today due to the market’s selloff. Any subsequent rally in these sectors would make for a better entry point. FAZ and GASX can be bought on dips below $20.57 and $18.10, respectively.”
- Christopher Mistal & Jeffrey Hirsch, Stock Trader’s Almanac, May 8, 2012