From a strong Black Friday of retail sales in the United States to the latest rumor of a potential breakthrough in Europe, stocks were out of the gate with a bang on Monday. And just about every equity sector benefitted from the shift from selling to buying – even if much of that buying was covering of short positions placed days or even weeks ago.
With markets moving higher in the short term, are the biggest near term edges likely to be on the long side, chasing stocks and ETFs higher, or on the short side, taking advantage of overbought conditions in bear markets like the one that European ETFs continue to languish in?
For months, European country funds have traded in bear market territory, making short term rallies and then selling off aggressively to new lows. And while there is the temptation to think that this time may be different, both recent experience in funds like the iShares MSCI Italy Index Fund ETF (XLI) and the iShares MSCI Germany Index Fund ETF (EWG) and the historical record suggest that rallies in overbought ETFs trading in bear market territory are best avoided, if not sold short.
Heading into trading on Tuesday, ETFs like the iShares MSCI France Index Fund ETF (EWQ) and the EWI were up more than 6%, with the EWG gaining more than 5%. This strength was enough to drive all three exchange-traded funds into overbought territory below the 200-day moving average. And should these funds continue to experience significant buying pressure, the likelihood that they will attract another round of selling will be that much greater.
Right now, all three funds have neutral ratings of 5 out of 10. But given their status after Monday’s strong gains, traders should not be surprised if continued buying brings rapid, even multiple-point ratings upgrades to any one of these already overbought European exchange-traded funds.
Traders who think I may be picking on Europe should know that other international equity funds like the iShares FTSE/Xinhua China 25 Index Fund ETF (FXI) were also up big on Monday. FXI finished higher by well over 3%, and is now overbought below the 200-day. Ending the day on Monday just shy of overbought territory was the iShares MSCI Brazil Index Fund ETF (EWZ), also up more than 3% on the day and trading in bear market territory.
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 TradingMarkets.com