To The Shorts Go the Spoils? 3 Inverse ETFs for Swing Traders
In my last column, “Short Seller’s Delight? 5 Inverse Funds for Swing Tradersâ€, I noted that our Top 25 PowerRating Stocks were increasingly populated by inverse or short ETFs.
These ETFs are typically the vehicles of hedgers and short sellers because they allow trader to bet against markets by buying an ETF that corresponds to the inverse of a given market, sector or international stock exchange. With short or inverse ETFs, wagering that Japanese stocks will go down, for example, is as easy as betting that they will go up. The inverse or short ETF will move down one point for every point higher the corresponding ETF or index moves up.
I also noted that many of the more popular inverse funds are also leveraged, typically 2 to 1. This means that for every point an given ETF moves down, for instance, a leveraged inverse fund based on that ETF will move two points up.
Friday’s close did little to change the terrain for swing traders. If anything, we are seeing an increase in the number of inverse ETFs relative to the number of high Short Term PowerRatings stocks.
This tells us a few things. The most important thing, however, is that stocks in general are extremely oversold. As an additional note, we have more than 200 stocks that have Short Term PowerRatings of 1. Our research into short term stock price behavior since 1995 indicates that stocks with Short Term PowerRatings of 1 are those most likely to underperform versus the average stock in the next few days.
From a more global perspective, the fact that we have more than 200 stocks with Short Term PowerRatings of 1 tells us that we have a very, very overbought stock market right now. Combined with the fact that the vast majority of quality pullbacks are in inverse or short exchange-traded funds, and the picture of the stock market could not be more clear.
All this said, it is important to realize that, in the immediate term, overbought markets can become even more overbought. In some respects, that is the very definition of a trend. So traders who are considering leaping into the market on the short side may want to be sure that they do not over-leverage themselves, or otherwise expose themselves to more risk than their own personal trading psyche and trading portfolio can stand.
But there is no denying that our PowerRatings are indicating that the best short term opportunities for swing traders right now increasingly appears to be in taking the current rally in stocks with more than the usual grain of salt.
ProShares UltraShort Russell 2000
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PowerRating) Short Term PowerRating 10. RSI(2): 6.34
ProShares UltraShort Small Cap 600
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PowerRating) Short Term PowerRating 9. RSI(2): 6.49
ProShares UltraShort Midcap 400
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PowerRating) Short Term PowerRating 9. RSI(2): 7.21
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