Going into trading on Tuesday, there are no exchange-traded funds (ETFs) that have earned ETF PowerRatings of more than 7. The same is true of our universe of leveraged ETFs.
There are a number of reasons why this is the case. But the most important one is the fact that many ETFs have pulled back below their 200-day moving averages. This means that, historically and statistically speaking, these funds have now become potential targets not for trades to the long side, but for trades to the short side. Accordingly, their PowerRatings have been downgraded.
At the same time, we appear to be in a potential transition point. While there are not a large number of high rated funds, there is not a large number of low-rated funds, either. We typically see far more potential short selling set-ups when markets have been below the 200-day for a period of time, and then rally up in a temporary bounce into overbought conditions below the 200-day.
This, particularly for non-leveraged ETFs, is how we get the kind of 1- and 2-rated ETFs that have historically underperformed in the short term. These are the ETFs that short term traders using PowerRatings should focus on when looking for markets to sell short.
One example of such a market is the ^DPO^ (above). DPO had an ETF PowerRating of 2 going into trading on Tuesday and has since had that PowerRating upgraded one point to 3.
Other exchange-traded funds with ETF PowerRatings of 3 or lower include the ^BRF^ (below). BRF also earned an upgrade from 2 to 3 early in trading on Tuesday.
With an ETF PowerRating of 3, the ^EWZ^ (below) is another ETF that has moved deeper and deeper into overbought territory below the 200-day moving average.
Recall that exchange-traded funds (ETFs) with ETF PowerRatings of 2 and 3 have made significant gains less than 24% of the time, based on our research. ETFs with ETF PowerRatings of 1 have fared even worse, making short term gains less than 21% of the time in our testing going back to 2003.
Find out more about what ETF PowerRatings can do for you and your trading. Click here to launch your free, 7-day trial to our ETF PowerRatings today.
David Penn is Editor in Chief at TradingMarkets.com.