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Equity Strategist: “The Bear is Alive and Kicking”

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The scramble for bonds was apparent in Monday’s market session as investors dove headfirst into safe haven government debt, which put downward pressure on Treasury yields. For exchange-traded fund (ETF) traders, it paved the way for bearish opportunities in leveraged-inverse funds that target weakness in the S&P 500.

“The bear is alive and kicking,” Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, said in a note on Monday. “We think the failed breakout last week for the S&P 500 confirms we are still mired in a cyclical bear market.”

Of course, the major bellwether in the market is still the U.S.-China trade war, which has been taken to greater heights as of late. China responded to the latest U.S. tariffs by pulling out of agricultural products and more measures are expected.

“These are not necessarily familiar risks, but this is not new and different,” said Kate Warne, investment strategist at Edward Jones. A larger market decline “should be reassuring that investors are not seeing this as a see change; they are seeing it as one more episode in what we all expect to be a long-running set of tensions both between the U.S. and China and the rest of the world.”

Furthermore, a black swan event could be occurring in Hong Kong with the ongoing protests. The protests, which have been festering since the start of the summer, poses a potential market risk that could translate to a black swan event. In financial sector vernacular, a black swan is a major disruption that could obliterate the markets and economy.

“I think the potential black swan, if there is a black swan right now, is what’s happening in Hong Kong right now,” said famed investor Steve Eisman, who was the subject of the book and film “The Big Short.” “If things escalate even further in Hong Kong, that would have a real impact back on the global economy.”

“That’s actually what I’m worried about the most right now, because every weekend we’ve got this drama where the people of Hong Kong are having protests in the millions and its starting to get very violent,” Eisman added.

For traders sensing an opportunity to take advantage of the bearish sentiment can look to leveraged-inverse funds like the Direxion Daily S&P 500 Bear 3X ETF (NYSEArca: SPXS). SPXS seeks daily investment results equal to 300 percent of the inverse of the daily performance of the S&P 500 Index.

The fund, under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the index equal to at least 80 percent of the fund’s net assets (plus borrowing for investment purposes).

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