When markets become unidirectional, one excellent option for traders who use PowerRatings to help guide their stock, exchange-traded fund and leveraged ETF trading is to look to the inverse leveraged ETF market for potential opportunities.
Why inverse leveraged funds?
When markets are becoming extremely overbought, for example, inverse leveraged ETFs that track those market tend to become very oversold. And as these funds become oversold, their leveraged ETF PowerRatings tend to increase – sometimes dramatically.
For example, while the three-day rally in the ^FAS^ provides little opportunity for PowerRatings traders in and of itself, the inverse of that fund, the ^FAZ^ has closed lower for four out of the past three days, earning a leveraged ETF PowerRating upgrade to 9.
Another example of this type of price action can be seen in the pullback and leveraged ETF PowerRatings upgrades in the ^SKF^ and the ^SDS^ (below).
There are also significant leveraged ETF PowerRatings upgrades in commodity-related leveraged ETFs, as well. Closing lower for two out of the past three days on Monday was the ^DUG^ and a pair of leveraged gold funds: the ^DGP^ and the ^UGL^ (below).
Looking beyond the world of leveraged ETFs, the majority of edges are on the short side (note that buying an inverse leveraged ETF is a bet on the short side) in stocks and non-leveraged funds. We have no stocks with PowerRatings of 9 or 10, and no ETFs with PowerRatings of 9 or 10, either. On the other hand, the number of stocks earning Stock PowerRatings of 2 topped 40 as of Monday’s close.
All of this suggests that a profit-taking sell-off is closer than many traders and investors likely realize. Should that happen in the next few days, PowerRatings traders should be able to take profits from any number of opportunities that have developed as overbought conditions become even more overbought and the fear of June and July begins to become the complacency of August.
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David Penn is Editor in Chief at TradingMarkets.com.