The Hot List: After the Rally, Should Traders Get Shorty?

One of the biggest challenges for traders looking to take the other side of the market’s rally is to avoid taking positions too early. And while the ETFs in today’s report are all short or bear market funds that have pulled back significantly as their underlying markets have soared, traders looking to pursue opportunities like these are best served by waiting for these short or bear market ETFs to reach truly extreme levels in order to take best advantage of any “snap back rally” as the markets revert to their mean.

Strength in the financials, for example, has helped dramatically improve the edges in the ProShares Short Financials ETF (SEF). SEF is a non-leveraged way for traders and active investors to take the other side of any rally in bank stocks and other financials. Down more than 5% ahead of trading on Friday, SEF is moving closer to the sort of extreme levels that have historically led to higher prices in the short term.

Another example of this sort of potential opportunity is in the market for the ProShares Short MSCI EAFE Index Fund ETF (EFZ). EFZ finished lower by more than 5% ahead of Friday’s session, closing down for five out of the past six trading days. The fund has been in similarly oversold extremes before in recent months, including two instances in late August and mid-September. In both cases, shares of EFZ were sharply higher 3-4 days later.

With the prominent role financial stocks play in the S&P 500, it is little surprise to see the ProShares Short S&P 500 ETF (SH) developing some of the greatest short term edges. Like SEF and EFZ, SH is a non-leveraged way for traders and active investors to get inverse equity exposure, in this case to the S&P 500.

SH dropped by more than 3% ahead of trading on Friday, finishing at its lowest level since late July. That said, the fund is relatively less oversold than either SEF or EFZ above.

All three exchange-traded funds (ETFs) in today’s report were available from research and data available through The Machine. To learn more, click here.

David Penn is Editor in Chief of