The S&P 500’s Danger Zone Is Hiding in These 100 Stocks. 2 Ways to Protect Yourself from the Implosion.

The S&P 500 Index ($SPAA) has held its ground better than the Nasdaq-100 Index ($IUXX). Some sectors are doing better than others. It is both a frightened market and a confident one. 

Eventually, something has to give. The market simply cannot straddle both worlds forever. 

With this in mind, I’m looking to find the soft spots – the segments that are hanging in for now, but look ready to fall off the proverbial cliff at any moment. So far I’ve found high-beta stocks to be most at risk. 

Think of these stocks like your friends who are so much fun… some of the time. After a while, they go from being the life of the party to ruining it. 

The Invesco S&P 500 High Beta ETF (SPHB) tracks an index composed of the 100 stocks within the S&P 500 that exhibited the highest sensitivity to market movements (otherwise known as “beta”) over the trailing 12-month period. 

SPHB’s chart above is waving a red flag for me. 

You can essentially see the sell orders dripping in, weighing down the chart. And when bounces happen, they do not last. 

You see, SPHB was built for investors and traders to piggyback on markets that favor higher-volatility stocks. But what happens when those stocks fall into the crosshairs of investors? It can create the opposite effect. That is, a cascading drop. It is quite possible we are seeing the early stages of that right now. 

SPHB rebalances on a quarterly schedule, and that creates a lag effect. When high-beta stocks reach peak valuations and turn lower, SPHB remains locked into those high-risk positions until the next scheduled index reset. Because high-beta stocks fall faster than the broader market during selloffs, SPHB experiences deeper drawdowns than cap-weighted ETFs like the SPDR S&P 500 ETF Trust (SPY).

For traders looking to hedge high-beta equity risk or actively position for downside in overextended market leaders, two targeted exchange-traded products match against SPHB’s exposure profile:

Direxion Daily S&P 500 High Beta Bear 3X Shares (HIBS)

The Direxion Daily S&P 500 High Beta Bear 3X Shares ETF (HIBS) seeks daily investment results equal to 300% of the inverse (-3x) of the performance of the S&P 500 High Beta Index. HIBS targets the exact same 100-stock basket as SPHB, but in reverse.

Because HIBS uses 3x daily leverage, it serves as a tactical tool for short-term downside trading rather than long-term holding. In a high-beta market washout, HIBS gains value rapidly as high-volatility equities fall.

AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL)

The AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL) uses a long/short market-neutral structure designed to capture the performance spread between low-beta and high-beta equities. BTAL takes long positions in low-beta U.S. stocks while simultaneously shorting high-beta U.S. stocks within the same industry groups on a dollar-neutral basis. 

And because BTAL is dollar-neutral, it does not rely on broad market directional declines to generate returns. It gains value whenever low-beta stocks outperform high-beta stocks, a pattern that typically occurs when investors rotate out of speculative high flyers and into defensive equities.

SPHB’s weighting model might be playing right into the hands of the bear. 

So, recognizing when high flyers roll over allows investors to step aside from SPHB or utilize inverse tools like HIBS and market-neutral tools like BTAL to manage portfolio risk.

Remember that today’s markets are historically wild. But at the same time, they are historically opportunistic, as long as you know how to use ETFs to your advantage. 

Rob Isbitts is a semi-retired CIO, former fiduciary investment advisor, and Barchart columnist. Check out his other work at ETFYourself.com (featuring the Fresh Charts weekly trading post), and ROAR.PiTrade.com, helping investors to better-manage their own portfolios.