Financial ETFs Oversold While Financial Stocks Stuck in Neutral

Major market indexes moved higher yesterday and most sectors moved from oversold to neutral based on PowerRatings. Financial Select Sector SPDR (NYSE: XLF) is one of the sector ETFs that remains oversold with a PowerRatings of 8. Although the ETF is oversold, its ten largest holdings are all rated as neutral with PowerRatings of 4,5 or 6.


The same is true for regional banks. SPDR S&P Regional Banking ETF (NYSE: KRE) is oversold with a PowerRatings of 9 but each of the ETF’s top ten holdings will start trading today with neutral PowerRatings.


PowerRatings are based on the relative strength or weakness of particular stocks or ETFs. The higher the rating, the greater the one week historical gain has been for stocks and ETFs with that rating. For best results, enter trades on stocks with a PowerRatings of 8 or higher with a limit order 3-7% below the previous day’s closing price. Higher % limit entries have historically shown a greater percentage of winning trades but higher % limit orders also reduce the chance of trade execution.

KREIn the past, buying stocks with a rating of 9 on a 3% pullback the next day and selling five days later has been profitable 75% of the time with an average winner of 4.3%. Other entries and exits also show high winning percentages and large average gains.

It seems reasonable to assume the largest holdings of an ETF are oversold if the ETF is oversold. These examples demonstrate that traders should always verify their assumptions and make trading decisions based on quantifiable data.

In today’s trading, ETFs tracking the financial sector could provide better trading opportunities than individual stocks within that sector.

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All data is as of the end of day on 4/14/2014.