Are Asian ETFs Irresistibly Overbought?

Could the iShares MSCI Taiwan Index Fund ETF (NYSE: EWT) be just one ratings downgrade away from another steep sell-off?

Rallying by more than 1% on Thursday, shares of EWT have finished at extremely overbought levels for the past two days in a row. This buying in bear market territory has earned the ETF a low, “consider avoiding” rating of 3 out of 10. Historically speaking, exchange-traded funds that earn such low ratings have tended to underperform in the short term, with most reversing and actually trading lower over the next few days.

In recent months, however, sellers truly have arrived in force whenever the stock’s rating has dipped below 3. For example, EWT was downgraded to 2 out of 10 after a three-day rally in August, and proceeded to sell-off for the next three days in a row, dropping by more than 3%.

EWT earned a 2 rating again in the first half of October, twice actually during a five-day stretch when the fund’s rating never rose above 3. The ETF fell for three out of the following four sessions, again losing more than 3%.

Another three-day sell-off followed EWT’s downgrade to a 2 out of 10 in the second half of the month.

It remains to be seen if the current rally in EWT will also be met by aggressive selling in the short term. Note that there are similar rallies – and similarly overbought conditions and low, “consider avoiding” ratings – in exchange-traded funds like the iShares MSCI South Korea Index Fund ETF (NYSE: EWY) and the iShares MSCI Malaysia Index Fund ETF (NYSE: EWM).

Traders and active investors who would rather buy than sell short in order to take advantage of any setback in the Asian stock rally may want to consider a leveraged, inverse alternative: the ProShares UltraShort FTSE China 25 ETF (NYSE: FXP).

Built to trade twice the inverse of the daily return of the FTSE China 25 Index, FXP has earned a “consider buying” rating of 8 out of 10 ahead of trading on Friday. And as with EWT, additional movement in the ratings toward extreme levels (in the case of FXP, an upgrade to 9 out of 10), could signal another opportunity for traders looking to buy weakness in Asian stocks in the short term.

The ETFs in today’s report were drawn from the data and research available through PowerRatings. To find out more, click here.

David Penn is Editor in Chief of