Leave it to a quant to take away the punchbowl just as the party is getting started.
Quant-based types often take a lot of guff for being the kind of traders who will not only catch a falling knife, but will also be more than ready to scoop up the occasional a dead cat, mid-bounce, and rumble all the way to the end zone with it.
But there’s another side to the data-driven trading game that can be equally vexing to the uninitiated: selling large up moves.
Bounces like those in markets like the iShares MSCI South Korea Index Fund ETF (NYSE: EWY) and the iShares FTSE Xinhua/China 25 Index ETF (NYSE: FXI) are the kind of moves that make it difficult for traders to sell. But when these moves take funds to overbought levels in bear market territory, the history and statistics point to near-term underperformance, which means that most traders should be pointed toward the exits.
The growing edges against these Asian ETFs are potentially significant enough for even short sellers to become attracted to these funds, increasing the possibility that these ETFs and others like the iShares MSCI Japan Index Fund ETF (NYSE: EWJ) will move lower over the next few days rather than higher.
Consider, for example, the FXI. The last time the ETF was as overbought as it is ahead of trading on Wednesday was in late November. Then a bounce to new, short-term highs – and two consecutive finishes in overbought territory – led to a sell-off in FXI of more than 6% by the time the ETF reached new short-term lows.
Heading into Wednesday’s session, both the FXI and EWJ have “consider avoiding” ratings of 2 out of 10. FXI finished higher for a third day in a row below the 200-day moving average, gaining more than 3% to close in overbought territory. Also closing higher for three straight sessions and overbought below the 200-day was EWY, which also finished up more than 3%. EWJ gained nearly 2% on the day.
FXI and EWJ both have a short-term negative edges of 2%. EWY has a negative edge of just over 3% as of Tuesday’s close.
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