Ultimate PowerRatings Trading Report: Overbought Markets and Inverse Leveraged ETFs
As equity markets have become overbought for extended periods of time this year – particularly since the February lows – one strategy that traders have been able to deploy has been trading leveraged ETFs – inverse leveraged ETFs in particular.
Remember that while regular, non-leveraged ETFs are moving higher day after day, becoming more and more overbought, inverse leveraged ETFs are stretching farther and farther away from their historical norms. Eventually – even if for a short period of time – our backtesting suggests that those inverse leveraged ETFs will bounce back.
By looking for those inverse leveraged ETFs that have earned leveraged ETF PowerRatings of 9 or 10, short term traders can focus in on those exchange-traded funds that have the greatest short term edges and the best likelihood of making significant short term gains.
The same is true of stocks, of course, which is where we begin today’s Ultimate PowerRatings Trading Report.
Stocks:
Among those stocks that have earned the most rapid PowerRatings upgrades over the past few days are stocks like ^BEAV^.
BEAV was a four-rated stock just five days ago. But in pulling back in recent days, the stock has begun to move into levels from which, according to our backtesting, stocks have typically rallied.
Another stock in this group would be ^TGI^. Five days ago, TGI had a Stock PowerRatings of 4.
TGI moved sideways in the final days of March. But as April began, sellers began to push the stock lower, creating new short term lows as the stock slid below its 5-day moving average, and earning its eventual PowerRatings upgrade to 9.
Exchange-traded Funds:
Continued overbought conditions have meant that the number of top-rated exchange-traded funds is small. Aside from the ^PFF^ (below), which has been pulling back since late March, there are no ETFs with ETF PowerRatings of 9 or higher.
Leveraged ETFs:
There are better opportunities for short term traders among leveraged exchange-traded funds than there is among regular, non-leveraged funds. Included among these potential high probability opportunities is the ^FAZ^, which earned an ETF PowerRating of 9 as of Tuesday’s close.
Perhaps even more noteworthy is the 10-rated ^ERY^. ERY has closed lower for six consecutive trading days. The fund’s ETF PowerRating has climbed from 6 to 10 over the past few days.
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David Penn is Editor in Chief at TradingMarkets.com.