Along with financial stocks, technology stocks – specifically semiconductor stocks – have been another place that investors have been more than eager to put their money in the opening frames of 2012. Perhaps betting that “the last shall be first,” traders are looking to underperforming sectors from last year like financials and, to a lesser degree, technology as a way of getting a leg up on the rest of the investing pack.
Maybe this strategy will prevail in the long-run. In the short-run however, this aggresive buying has helped push these markets into overbought territory. As such, both financial and technology stocks are likely to be especially vulnerable to both profit-taking and potential short-selling until the overbought conditions moderate.
For traders, and more active investors, this represented a short-term opportunity last week as the ProShares Ultra Semiconductors ETF (NYSE: USD) rallied deeper and deeper into overbought territory.
USD earned “consider avoiding” ratings of 3 or less early in the week, just as the ETF rallied to finish in technically overbought territory. Over the balance of the week, the fund continued to earn low ratings until finally USD had become so short-term overbought that the ETF’s rating could fall no further. Earning a 1 out of 10 rating on January 12, shares of USD had closed in extreme overbought territory for four days in a row.
Traders who took that final, lowest possible rating to heart, selling short the USD on the close of that downgrade, would have realized a quick, one-day gain of more than 4% as the ETF plunged sharply on Friday. Whether the ETF will continue to trade even lower when the stock market opens on Tuesday remains to be seen. But in closing down by more than 4% and, more importantly, with a 2-period RSI of less than 30, USD has already sold-off to a level where traders who sold the fund short in late in the week are likely to be ready to lock in short-term gains.
For those who cannot or are not interested in selling ETFs short, the ProShares UltraShort Semiconductors ETF (NYSE: SSG) provided a virtually, identical (albeit inverse) opportunity for traders and active investors to get short exposure to the semiconductor sector without having to borrow shares.
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David Penn is Editor in Chief of TradingMarkets.com