Overbought Market Needs a Healthy Pullback

Since March, all these charts look good. Too good. Market momentum is fading along with volume. Small caps have rocketed off the March lows. I tried the short side with double-short IWM (TWM) today. Didn't work.


The financials led the stock market off the March lows, as fears of a full-fledged financial collapse faded. However, the financial ETF (XLF) looks highly overbought for now. A pullback here could accompany a broader market pullback, as financials often lead the overall market.


Apparently we got a "Dow Theory" buy signal Friday when the Transports exceeded their January highs, confirming a prior signal from the DJIA. In truth, the transport ETF (IYT) is a fine looking chart. Highly overbought though.

China has been a leadership market. Some recent mixed signals out of the People's Republic regarding credit growth, but, the concensus seems to be China is rebounding strongly. Looks like FXI may be heading down toward the 50 DMA around 39.


If you're worried about what the US Governement is doing to the value of the US Dollar, and I am, the Australian Dollar may be a better store of value. Australian banks are in better shape, they have responsible fiscal policy with interest rates bottoming at 3%, not 0%, and have natural resources in demand by their neighbor China.

Disclosures: Long FXA, SDS, USO.

Comments

[robroncag:]

Looking for the ETF short to makt the biggest move. I'd appreciate any ideas, Thanks

Aug 11 07:48 AM

[Dr. O:]

The Direxion family of triple-levered daily returns seems to top the list on up and down days. These triple-levered funds do NOT work, in general, over weeks or months.

The most popular ETFs by volume on the short side are ProShares: SDS is double short the S&P 500, QID is double short the Nasdaq 100, and TWM is double short the Russell 2000. Ultra short sector ETFs are popular too. If you want even more action, Proshares even has ultra-short China (FXP) and Brazil (BZQ).

I use Yahoo Finance ETF screener. Just type in a few letters of what you're looking for and a drop-down list of choices appears.

There's an old saying "never short a dull market." People can complain all they want, markets spend most of their time going up or sideways. They tend to go down very fast, and, somewhat unpredictably. So although you and I may think that stocks "should" go down, they may not for a while.

People were shorting the 1990s bull run and got creamed. Same thing with the 2003-2007 bull run. It's over when it's over, and you wait for clear signs that the uptrend has broken.

Aug 11 08:30 AM

[Rainmon:]

What do you guys think about going with the TBT and selling covered calls as a conservative short play: UltraShort 20+ Year Treasury ProShares (TBT), as rates can't go much lower?

Aug 11 09:03 AM

[Dr. O:]

I like TBT, although some people just outright short TLT (you pay the interest though).

Aug 11 09:46 AM