Short-Term, High-Probability Mean-Reversion Indicator: Waiting Patiently on the Sidelines

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 |  Includes: DIA, EEM, EFA, EWY, EWZ, FXI, GDX, GLD, IBB, IWM, IYR, OIH, QLD, QQQ, RTH, SDS, SMH, SPY, SSO, TBT, TNA, TZA, USO, VXX, XLB, XLE, XLF, XLI, XLU, XLV, XLY
by: Andrew Crowder

It was the second day of losses for the major indices, but the $117.50 – $118.00 level on the S&P 500 tracking ETF SPY has managed to keep the losses at a reasonable level.

Since the gap down on the 16th, the major benchmark has muddled around this area without the bulls or bears showing much directional conviction. Interestingly enough, I placed my last trade on the 16th and I would imagine until this market shows some direction, I will remain patiently on the sidelines.

However, as we all know, the longer the market trades in a tight range, the more apt it is for a strong directional move outside of the range. The problem is, no one quite knows which direction the market is headed.

There are a few more oversold readings in the ETFs I follow for the High-Probability, Mean-Reversion Strategy, namely Health Care (NYSEARCA:XLV), Utilities (NYSEARCA:XLU), and the European Union (NYSEARCA:EFA), but none of them have been able to move into an extreme reading.

Today brings the Beige Book, so we could see a decent directional move this afternoon after it is released. If not, I would imagine that the unemployment report due out before the bell Friday will ignite a directional move. At least I hope so.

Short-Term High-Probability, Mean-Reversion Indicator – as of close 11/30/10

Benchmark ETFs

* S&P 500 (NYSEARCA:SPY) – 38.8 (neutral)
* Dow Jones (NYSEARCA:DIA) –33.9 (neutral)
* Russell 2000 (NYSEARCA:IWM) – 49.8 (neutral)
* NASDAQ 100 (QQQQ) – 38.6 (neutral)

Sector ETFs

* Biotech (NASDAQ:IBB) – 35.5 (neutral)
* Consumer Discretionary (NYSEARCA:XLY) – 48.4 (neutral)
* Health Care (XLV) – 26.2 (oversold)
* Financial (NYSEARCA:XLF) – 37.8 (neutral)
* Energy (NYSEARCA:XLE) – 49.7 (neutral)
* Gold Miners (NYSEARCA:GDX) – 54.9 (neutral)
* Industrial (NYSEARCA:XLI) – 48.4 (neutral)
* Materials (NYSEARCA:XLB) – 50.6 (neutral)
* Real Estate (NYSEARCA:IYR) – 47.5 (neutral)
* Retail (NYSEARCA:RTH) – 60.7 (neutral)
* Semiconductor (NYSEARCA:SMH) – 48.8 (neutral)
* United States Oil Fund (NYSEARCA:USO) – 51.5 (neutral)
* Utilities (XLU) – 27.7 (oversold)

International ETFs

* Brazil (NYSEARCA:EWZ) – 39.3 (neutral)
* China 25 (NYSEARCA:FXI) – 35.4 (neutral)
* EAFE (EFA) – 23.3 (oversold)
* South Korea (NYSEARCA:EWY) – 41.4 (neutral)

Commodity ETFs

* Gold (NYSEARCA:GLD) – 68.5 (neutral)

Ultra Extremes

* Small Cap Bear 3x (NYSEARCA:TZA) – 48.6 (neutral)
* Small-Cap Bull 3x (NYSEARCA:TNA) – 49.8 (neutral)
* UltraLong QQQQ (NYSEARCA:QLD) – 38.0 (neutral)
* Ultra Long S&P 500 (NYSEARCA:SSO) – 37.2 (neutral)
* Ultra Short S&P 500 (NYSEARCA:SDS) – 60.5 (neutral)
* UltraShort 20+ Treasury (NYSEARCA:TBT) – 31.0 (neutral)

Disclosure: Short SPY