Much of the strength in the Thursday’s rally was due to renewed buying in financials. The financially-heavy ^SPY^ outperformed the tech-laden ^QQQQ^. And the ^XLF^ was among the better performing, non-leveraged sector funds on Thursday – a day when many ETFs were moving strongly higher.
Given all the anxiety in the market, how are traders to interpret this recent show of strength? Time to buy? Time to sell?
Fortunately, Ultimate PowerRatings provide a ready guide for short term traders, regardless of broad market conditions. By looking at some of the major, equity index ETFs and checking their PowerRatings, traders know at a glance whether the edges are on the long side, the short side, or even when there are no significant edges in the market to trade, at all.
Going into the final trading day of the week, the biggest edges are clearly on the short side. While there are a handful of exchange-traded funds with “consider buying” PowerRatings of 9 or 10, we have more than 30 ETFs – all non-leveraged funds – that have been downgraded to a “consider avoiding” – or selling short – PowerRating of 2 or 3. In today’s’ report, we’ll take a look at one sector – financials – that has more than their fair share of low rated funds and which may be a good place to look for potential set-ups over the next few days.
^XLF^
With an ETF PowerRating of 3, the Financial Select Sector SPDR ETF joins a growing number of non-leveraged ETFs climbing deeper into overbought territory at week’s end.
The last time XLF had an ETF PowerRating of 3 was back in June 21st. Three days later, XLF was down by well over 3%.
Other non-leveraged financially-based ETFs that traders may want to look out for are the 3-rated ^IYF^ and the 2-rated ^RKH^.
^UYG^
Also earning a “consider avoiding” ETF PowerRating of 3 ahead of trading on Friday was the ProShares Ultra Financials ETF.
UYG has been under selling pressure more often than buying pressure over the past several weeks, earning timely ETF PowerRatings upgrades during declines in May. Recent strength, however, has pushed the fund up into overbought territory, helping the ETF earn a two-point downgrade to its current level.
As the PowerRatings chart shows, UYG had earned a downgrade to 3 during its last oversold rally. That rally resulted in a 17% peak-to-through pullback in the fund over the second half of July.
^FAS^
Traders who have taken advantage of ETF PowerRatings upgrades in FAS have been frequently rewarded this year. An upgrade to 10 – our highest level – in early May helped FAS climb more than 18% in three days. And a more recent upgrade to 9 just a few days ago anticipated the fund’s rally of more than 15% going into Friday’s trading.
Recent strength now means that FAS has earned an ETF PowerRating downgrade to 3. Like UYG, the Direxion Financial Bull 3x Shares earned its last major downgrade back in mid-June, shortly before the fund’s 24% retreat into the end of the month.
Traders who would rather buy than sell short – or traders who are in restricted accounts – may want to look at inverse ETFs as a way to get exposure to overbought conditions in financials. Traders in this situation may want to consider funds like the 8-rated ^FAZ^ or the 8-rated ^UYG^.
Isn’t it time you gave Ultimate PowerRatings a try? Quantified, backtested analysis on stocks, exchange-traded funds and leveraged ETFs to help you find the best markets with the biggest edges every trading day. Click here to learn more.
David Penn is Editor in Chief at TradingMarkets.com.