PowerRatings and Soaring Short ETFs

I have been banging the drum for a sell-off for the past several days as the number of short ETFs on our Top 25 PowerRatings list has increased. If you have been following along, then the aggressive selling we saw on Tuesday should have been little surprise.

Our sense that a sell-off was imminent had nothing to do with Treasury Secretary Geithner’s address on Tuesday, or the fate of the president’s stimulus plan in the Senate.

I will say that the negativism and pessimism I am hearing after the close is impressive. CNBC’s Fast Money labeled it the “$2 Trillion Plan about Nothing” and announced “Geither Plan Lays Egg.”

And true enough, on a day when the Dow drops more than 380 points, it can be easy for traders (and even easier for pundits and observers) to get distracted by the hiss of the foam and miss the power of the underlying wave.

For us, however, that underlying wave is everything. That underlying wave is the rhythm of markets moving back and forth between oversold extremes and overbought extremes. Over and over again, we look for instances in which stocks or ETFs have become excessively overbought and sell them until they show signs of weakness. Conversely, we look for stocks and ETFs that have been sold aggressively — too aggressively by our understanding of how markets really work. Those are the stocks and ETFs we look to buy for short term trades to the upside.

Of the three inverse ETFs mentioned in yesterday’s column, all are up big as of Tuesday’s close. PSQ up more than 3%. SDS is up more than 9% and SIJ up nearly 10%. Those short ETFs in the previous column (“PowerRatings: Selling the News and Buying the Short ETFs”) are also up big on the day.

If you took trades in any of these short ETFs, start thinking about taking at least partial profits. Again, we don’t overstay our welcome when it comes to short term trades. There is always another opportunity around the corner and we should be thinking more about our next trade than our last one.

With regard to stocks, Thoratec Corporation
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has managed to maintain its high Short Term PowerRating. Wisconsin Energy Corporation
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, however, has suffered insofar as it has fallen and closed below its 200-day moving average. Although still oversold, if not more so, WEC is not a place for new capital at this time.

Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days. Click here to start your free, 7-day trial to our Short Term PowerRatings!

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