Floor traders were among the most colorful group of professionals ever to work on Wall Street. Computers have replaced most floor traders but we can still benefit from the wisdom that group developed over the decades of watching market action from the front row. Often this wisdom was reduced to simple phrases, like “buy the rumor, sell the news.”
This week’s market action might provide an example of what that old saying means. Rumors drove stock prices last week and major stock market averages were overbought at the close on Friday.
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We could see news from Washington this week instead of rumors. After two weeks of a government shutdown and the debt ceiling crisis only hours away, politicians will finally take action or a default will occur. Either way, stocks could move quickly when the news hits. Since prices are overbought, the possibility of a selloff cannot be ignored.
If a default does occur, banks could be among the hardest hit sectors because they could suffer losses on Treasury securities they hold on their balance sheets. SPDR S&P Regional Banking ETF (NYSE: KRE) is among the most overbought ETFs in the market and could be among the most vulnerable in a selloff.
A chart of SPDR S&P Regional Banking ETF (NYSE: KRE) is shown above.
Short-Term Trading Opportunities
PowerRatings are based on the relative strength or weakness of particular stocks or ETFs. The higher the rating, the greater the one week historical gain has been for stocks and ETFs with that rating.
PowerRatings can be used to find long or short trades. With the major market averages overbought, short trades could be more profitable. For best results, enter these trades with a limit order 3-7% above the previous day’s closing price. Higher % limit entries have historically shown a greater percentage of winning trades but higher % limit orders also reduce the chance of trade execution.
Companhia Siderúrgica Nacional (NYSE: SID) operates as an integrated steel producer primarily in Brazil. Both the steel sector and iShares MSCI Brazil Capped (NYSE: EWZ) are also overbought. RSI(2), the two-day RSI, of SID is overbought at 97.05.
Market Timing Tool
The Market Timing Tool is used with several strategies to increase the probability of winning trades. By highlighting bear markets, this tool will help avoid long trades when the market is in a long-term decline. This indicator is bullish.
All data is as of the end of day on 10/11/2013.