The year 2024 was generous indeed for investors – and it will be a tough act to follow in the new year. While it’s tempting to indulge our normalcy bias and assume that “a trend in motion tends to stay in motion,” I think we should consider the contrarian case for this year. My pick for defensive-minded investors is the ProShares UltraShort S&P 500 ETF (SDS), writes Clif Droke, editor of Cabot Turnaround Letter.
There are a number of indications the contrarian case could prove profitable for investors in 2025. Consider, for instance, that as of the final weeks of 2024, investors were heavily positioned for a market melt up.
As a recent Wall Street Journal article put it, participants have lately “stampeded into funds tracking US stocks,” with index ETFs bringing in the second-largest weekly inflow since 2008 in late November. One of the largest ETFs tied to the Russell 2000 Index attracted almost $4 billion in a single trading session earlier that month — the highest rate since 2007. The latter year, of course, immediately preceded the Great Financial Crisis.
Meanwhile, the Financial Times reported that the trading accounts of US banks exceeded $1 trillion as of late 2024, which was the highest level since 2008 (again, immediately prior to the worst part of the credit crisis). The FT further noted that the growth of trading funds had left the banks, “particularly the largest ones, more exposed to market moves than at any time since the financial crisis as they hold ever-greater inventories of price-sensitive securities.”
A final factor worth mentioning was highlighted by the well-known market analyst Tom McClellan, who observed that the first year of a new incoming US president typically witnesses a disappointing stock market performance. The trend often begins immediately after inauguration day in January, with the S&P 500 Index historically declining for the first nine-to-10 months before bottoming.
In view of the contrarian case for the bear to possibly emerge in the coming months, the temptation to view SDS as a potential contrarian play for 2025 might just be too great to resist for some participants. Indeed, after declining 60% from its October 2022 high price (when broad market selling pressure reached a peak), SDS could almost be regarded as something of a “turnaround” play for the year ahead.
Predicting bearish market environments is a tenuous business at best since bears tend to be elusive for investors who seek them. That said, I believe 2025 will witness its fair share of market challenges and above-normal volatility spikes. For this reason, owning a small position in SDS as a hedge could prove worthwhile for defensive-minded investors.
