PowerRatings and the Revenge of the Short ETFs
As we have been suggesting for the past few days, overbought conditions in stocks were met on Thursday with a dramatic sell-off, sending stocks reeling toward oversold territory and launching many short/inverse ETFs higher.
In yesterday’s column, I pointed to a number of short ETFs that ETF traders might want to keep an eye on over the next few days. All of those ETFs were significantly higher on the day today and if there is similar sentiment on Friday, then these exchange-traded funds may see additional follow-through to the upside to finish the week.
Our Short Term PowerRatings roster was filled with high PowerRating ETFs going into trading on Thursday. But the sell-off has dramatically reduced their number, so much so that traders who took advantage of the overbought conditions with timely trades in short ETFs may want to begin thinking about taking profits — or at least partial profits — lest the severity of Thursday’s selling induce (a) more than a few traders to attempt to bottom-fish or, more likely, (b) aggressive short-covering that sends stocks higher faster than we might expect.
The likelihood is that there will be at least some additional movement to the downside on Friday. The bulls hope it comes early, more as a spill-over from Thursday’s trading than as a fresh round of new sellers coming to the market. The bears would prefer to see selling late, perhaps just in time to quash any short-covering or value-chasing rally that might emerge from the rubble of Thursday’s selling.
For now, we’ll wait and see what Friday’s market brings. Again, we will either see more selling, which will help create the next round of pullbacks and opportunities to the long side, or we will see stocks bounce in the face of Thursday’s selling. The later option will give us the chance to “re-set†potential trading opportunities to the short side and once again, high Short Term PowerRating short/inverse ETFs with low 2-period RSIs will be our primary targets.
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