Bond ETFs remain the most consistent source of short-term weakness in the stock market right now. For traders looking to buy pullbacks and sell into rallies, the wide, range-bound price action in funds like the iShares Barclays Aggregate Bond Fund (NYSE: AGG) going back to September 2011 has provided a number of opportunities to take advantage of short-term price extremes.
So, does recent selling in these ETFs suggest that a reprise of this “buy the selling, sell the buying” pattern is in the offing? Like AGG, the Vanguard Total Bond Market ETF (NYSE: BND) has closed lower for three out of the past five days, alternating between up days and down days as the fund works off overbought conditions from a six-day rally to end January.
Neither ETF is as oversold now as it was prior to that month-ending advance. But with these bond funds trading near levels where buyers historically and recently have come off the sidelines to bid markets higher, the potential for a short-term move to the upside may be is greater than it has been in a week.
Both AGG and BND have short-term positive edges of more than half a percent ahead of trading on Wednesday.
Also pulling back into oversold territory above the 200-day moving average is the PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP). Shares of UUP rallied to new, 52-week highs in mid-January, and has since sold off by more than 3%. The ETF has closed higher for three days in a row before dropping on Tuesday, and has a short-term edge of half a percent.
The selling pressure on UUP has been so consistent that the stock has only closed once above its 5-day moving average in the past two weeks. The last time UUP was as oversold as it has become in recent days was during the fund’s month-long correction in October that took the ETF briefly back into bear market territory.
One interesting area of depature from the pullbacks in this bond market are the relatively overbought conditions in the high yield, corporate bond market. While many traders and investors have grumbled about the underperformance of this sector, of late ETFs like the iShares IBoxx High Yield Corporate Bond ETF (NYSE: HYG) and the SPDR Barclays High Yield Bond ETF (NYSE: JNK) have closed higher for three days in a row above the 200-day moving average and are set to open in short-term overbought territory when trading begins on Wednesday.
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David Penn is Editor in Chief of TradingMarkets.com