Going into trading on Tuesday, some of the biggest edges in the equity ETF market are in sector-based leveraged exchange-traded funds.
One point I’ve made frequently whenever markets become overextended is that there are often significant opportunities in leveraged ETFs. Many times, these opportunities arise as markets are closing higher day after day after day, becoming more and more overbought. While this means that quality pullbacks and top PowerRatings in stocks and non-leveraged ETFs can become hard to find, it also means that opportunities on the leveraged side of the market – especially the inverse leveraged side – are likely becoming much more numerous.
Let’s take a look at some of those leveraged ETFs that have earned top Leveraged ETF PowerRatings as of Tuesday’s open. To learn more about trading leveraged ETFs using Leveraged ETF PowerRatings, click here to launch your free, 7-day trial.
The ^FAZ^ (below) earned a one-point Leveraged ETF PowerRatings upgrade on Friday, moving from a 9 to our highest rating of 10. Recall that leveraged ETFs that earn upgrades to 10 have made significant short term gains more than 78% of the time in our quantified backtesting.
Shares of FAZ have closed lower for four consecutive trading days. The last time FAZ earned a Leveraged ETF PowerRatings upgrade to 10 was at the beginning of August. Within four days, the ETF was up well over 4%. An upgrade to 10 back in mid-July sent FAZ soaring by more than 15% in less than five days.
Also reflecting the strength in financial stocks is the Leveraged ETF PowerRatings upgrade in the ^SKF^. SKF has closed lower for four days in a row leading into Tuesday’s trading, as well.
Small cap stocks have also been in strong demand in recent days. This has meant lower prices for the ^TZA^ (below), which earned a Leveraged ETF PowerRatings upgrade to 9 ahead of Tuesday’s trading.
The last time TZA had a Leveraged ETF PowerRating of 9 was back in mid-July. Five days later, the exchange-traded fund was up more than 7%.
Two other major sectors have experienced significant buying to end the month of August and start the month of September: energy and technology. For high probability Leveraged ETF PowerRatings traders, this means that it is time to look at leveraged ETFs like the ^ERY^ and the ^TYP^ (below).
Both ERY and TYP have Leveraged ETF PowerRatings of 9 going into Tuesday’s trading. ERY and TYP have traded in a similar fashion over much of the summer, with both funds pulling back sharply over the past few days as buyers have poured capital in both energy and technology stocks. Profit-taking in these sectors, which will come sooner than later given the extended nature of the current market, will have a positive effect on leveraged ETFs – inverse leveraged ETFs – like the ERY and the TYP, as well as the inverse leveraged ETFs mentioned above.
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David Penn is Editor in Chief at TradingMarkets.com.