ETF Traders Are Quietly Positioning For Market Turbulence: Direxion

American equities might be printing new highs, but leveraged ETF flows are suggesting a market that is becoming more tactical rather than euphoric. Edward Egilinsky, managing director and head of Alternative Investments at Direxion ETFs, on Thursday said that in August, there was a move away from vanilla bullish wagers to hedging and taking profits.

“You know, everybody that’s watching, it’s no surprise. The U.S. markets are at record highs, at least the large cap and mega cap stocks,” Egilinsky told Benzinga’s Premarket Playbook. “So what we’ve seen basically is a little bit of lighter flows in August in terms of inflows. We have seen mostly people looking to trade the bear side of a lot of these moves, looking for some level of retracement. And we’ve seen some profit taking in the bull product.”

“You mentioned like gold miners that’s been ripping all year. So we’re not surprised we see a little bit of outflows in the bull funds for the most part and inflows in the bear funds, especially when you get markets at these type of levels, people are taking profits,” he added.

Small-Cap Rally Faces Fed Test

Even outside leveraged trades, investors are wondering if the recent rotation will hold up, especially in small-cap stocks. Egilinsky said that it remains to be determined whether the rotation is happening in small-cap stocks.

“I think the Fed meeting in September, is baked in the cake already, based on the Fed futures. The probability, basically talking 90%+ of a cut in September. So they’ll be looking at what the Fed says. And if the Fed says we might be one and done here, you know, that might be it for the small-cap rally. And you might see that rotation right back out.”

Also Read: Small-Cap ETFs Just Became The Hot New Trade—Thanks To Powell

Hedging Without Triggering Taxes

Direxion’s index-based and single-stock leveraged ETFs are also tactically being used as hedges.

Asked if the funds are used by investors to sidestep selling and realizing capital gains, Egilinsky said: “Our ETFs are designed for short term active traders. You got to monitor these on a day to day basis. They’re not designed to be tax efficient.”

“Now, with that said, if you want to hedge gains in an individual stock, for example, then you could possibly use our non leveraged inverse ETFs, which is just inverse whatever the upside is for that given day of a given single stock or broad or broad index like the S&P 500. So those could be used, those tools, the inverse funds to hedge potential long gains, especially in taxable accounts.”

“However, whatever hedge you want to maintain, you’ve got to at least rebalance often to make sure you’re maintaining that percentage hedge of whatever you want to be hedged on," he said.

Palantir: A Case Study In Tactical Trading

The hedging-with-inverse-ETFs strategy has been put to real-world work in stocks such as Palantir Technologies Inc PLTR, which has sprinted from single digits to a high in the triple digits this year.

“Could they be utilized to at least protect gains? Yes. Do you need to monitor them day to day? Of course you do. And the higher the leverage point, the more tactical you have to be,” he explained, adding that Direxion Daily PLTR Bear 1X Shares PLTD has been one product investors have employed during volatile swings.

“In August, you had, intramonth, about a 20% pullback from peak to valley. Palantir really didn’t have much of a move for the month, but intramonth, there was tremendous volatility. So like you said, for short term tactical traders that can take advantage of that, PLTD might be something people would utilize also for an outright short or like you said, to hedge some gains, especially for that swing period in August, there we had a significant decline.”

Mega-Cap Tech And AI Trades Remain Active

The same strategic thinking was present in mega-cap tech and AI trades. A positive antitrust verdict for Google pushed Alphabet Inc. GOOG GOOGL and Apple Inc. AAPL to fresh highs, and investors have ridden Direxion’s lineup of leveraged single-stock ETFs to catch those moves.

"Apple on a resistance level, I know you look at technicals, is hitting right at that 238 area. If it could bust through towards 240, you might see higher prices," Egilinsky said.

"There are ways you could play that, of course, off of headlines. We got the whole leverage and inverse single stock suite, 2x bull, inverse bear. On Apple, on the 2x bull, it’s Direxion Daily AAPL Bull 2X Shares AAPU. On the bear, on the inverse 1x bear, it’s Direxion Daily AAPL Bear 1X Shares AAPD.”

“Of course, we have all the leverage inverse single stocks on the Mag 7. If you want to play it a la carte, if you want to play it collectively, we have an equal-weight Mag 7. You can play the bull and bear on that 2x bull and non-leverage inverse bear on the Mag 7 collectively," he added.

August ETF Flows Confirm The Shift

Flows reflect that traders aren't blindly bullish even with markets at record highs, according to Egilinsky.

August witnessed inflows into Direxion Daily Semiconductor Bear 3x Shares SOXS, Direxion Daily S&P 500 Bear SPXS, Direxion Daily Gold Miners Index Bear 2X Shares DUST and Direxion Daily Junior Gold Miners Index Bear 2X Shares JDUST, together with selective bullish demand in names such as Palantir and Eli Lilly And Co LLY during pullbacks.

Outflows were “predominantly in bull funds for the month,” a reflection of profit-taking following several sectors reaching not only 52-week highs, but all-time highs.

Discipline Remains The Core Rule

For leveraged ETF traders, Egilinsky’s counsel is the same: timing, discipline, and monitoring every day are not optional.

"These are path dependent vehicles. What does that mean in English? The trend's your friend," he said. "The longer it takes for something to trend in your direction, the likelihood is that you may lose money. So timing matters with these vehicles."

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Image created using artificial intelligence via Midjourney.