Pockets of Opportunity and Cause for Caution

What about our seasonal bet on ProShares Ultra Utilities (NYSE: UPW), an ETF that delivers two times the daily return posted by the Dow Jones US Utilities Index?

On 38 occasions since 1969, the Dow Jones Utilities Average has rallied in the fourth quarter. To take advantage of this seasonal strength, we usually buy ProShares Ultra Utilities in early October and sell at the end of December—or when we have a tidy profit to take off the table.

(Click graph to enlarge.)

We booked a 15 percent profit on this trade last year; this time around, the ETF has gained 4.6 percent since the start of the fourth quarter. Some of this recent upside reflects the rally in US equities and ongoing rotation out of cyclical sectors.

However, uncertainty about when the Federal Reserve will raise interest rates makes our seasonal bet on ProShares Ultra Utilities a riskier proposition this fall; the run-up to a Fed rate increase historically has been marked by volatility in utility stocks and other dividend-paying equities.

And although we expect the S&P 500 to retest its high in the fourth quarter, the ETF would lose value more quickly in the event of a pullback in the broader market—always a possibility in the latter stages of a bull market.