PowerRatings, Overbought Markets and Trades from the Short Side

With the S&P 500 making its highest close in ten days on Friday (the 13th!), even the most nervous and anxious bulls are starting to get their rally on. Not only does the move higher in the S&P 500 bring that index even deeper into overbought territory, but the companion rallies in the Dow industrials, Nasdaq Composite and Russell 2000 have similarly created exceptionally overbought conditions.

Our trading strategy when markets become so wildly overbought is to shift our focus from high Short Term PowerRating stocks to high Short Term PowerRating ETFs. When markets are overbought, those high Short Term PowerRating ETFs are almost exclusively short or inverse ETFs, which track the opposite of their underlying benchmark.

For example, the ProShares Short S&P 500 ETF, SH
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, which was recently one of our “5 PowerRatings ETFs for the Next 5 Days” has the S&P 500 as its benchmark. But as a short ETF, SH seeks to produce the inverse of the daily return of the S&P 500. So if the S&P 500 was down 1%, we would expect the SH on that day to be up 1%.

It has been our strategy to look to buy high Short Term PowerRatings ETFs as they pull back — just as we would with high Short Term PowerRating stocks. In other words, with ETFs as with stocks, we look to buy weakness and sell into strength. Short Term PowerRatings help us identify that weakness by awarding the most oversold, the most likely to rebound ETFs and stocks with the higher PowerRatings of 9 or 10.

Right now we have more high Short Term PowerRating ETFs than I have seen in some time. In fact, 24 out of the 25 stocks in our Top 25 PowerRatings Roster is not only a short ETF, but is a short ETF with a high Short Term PowerRating of 9 or 10. This is indicative of a market that is exceptionally stretched to the upside. And our research tells us that when those markets that are exceptionally stretched to the upside are trading below their 200-day moving averages, the likelihood of a reversal to the downside are significant.

All five of the ETFs from yesterday’s column remain valid opportunities for short term ETF trading strategies based on buying weakness and selling strength. Any weakness in these funds — as long as they continue to trade above their 200-day moving averages — is something that short term traders should be especially vigilant for given the already dramatically oversold nature of these exchange-traded funds.

Does your stock trading need a tune-up? Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days.

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Whether you have a trading strategy of your own that could use a boost or are looking for a way to tell the stocks that will move higher in the short term from the stocks that are more likely to disappoint, our Short Term PowerRatings are based on more than a decade of quantified, backtested simulated stock trades involving millions of stocks between 1995 and 2007. Click the link above or call us at 888-484-8220, extension 1, and start your free trial today.