3 Overbought ETFs for Short Term Traders

Financials may be the focus on the final trading day of the week, with stocks like US Bancorp (NYSE: USB) and Fifth Third Bancorp (NYSE: FITB) up 2%, closing higher for a third day in a row, and ending the week at new, short-term highs.

But based on the short-term overbought conditions in ETFs representing sectors like retail and homebuilding, it may be that the economy’s hottest sectors right now are located elsewhere in the stock market.

A midday scan of the most overbought exchange-traded funds on Friday revealed that when it comes to sectors that may have moved too far, too fast to the upside, the home construction and retail sectors are second to none. Up more than two and a half percent on Friday and closing in technically overbought territory above the 200-day moving average for a second day in a row, the iShares Dow Jones US Home Construction Index Fund ETF (NYSE: ITB) is the most technically overbought fund in our database.

Should traders chase this ETF higher next week, they could easily drive ITB to its most overbought levels in months. Already, heading into trading on Monday, the fund has earned a negative edge in the short-term of more than three and a quarter percent.

Also overbought in the short-term is the Homebuilders SPDRS ETF (NYSE: XHB). Shares of XHB added almost two percent on Friday, closing higher for a third day in a row and finishing in technically overbought territory above the 200-day moving average for a second day in a row. The fact that the fund’s last trip to overbought territory at the beginning of February resulted in a near, month-long trading range is a reminder that overbought markets above the 200-day moving average are often resolved with sideways trading, as opposed to sharp sell-offs. This is why using low ratings and negative edges as signals for potential pullbacks down the line can be an excellent way to use both ratings and edges when trading markets above the 200-day moving average.

In addition to the short-term strength in homebuilders and home construction ETFs, retail exchange-traded funds have also rallied to levels where traders have been inclined to start taking profits. The Market Vectors Retail ETF (NYSE: RTH) – heavily weighted with big box stores like Walmart Stores (NYSE: WMT) and Home Depot (NYSE: HD) – has finished for the past three days in a row in technically overbought territory, breaking out above a trading range that extended through much of February. Only slightly less overbought in the short-term is the more equally-weighted retail ETF, the S&P Retail SPDRS ETF (NYSE: XRT), which is also up three in a row ahead of trading on Monday.

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David Penn is Editor in Chief of TradingMarkets.com