It was a light trading day yesterday and the third consecutive day of range-bound movement within the major market benchmarks. Most of the ETFs I follow within the High-Probability, Mean-Reversion Strategy have not been able to make much progress since the gap up last Wednesday (12/01). I made a trade last Friday and surprisingly, the market was able to make some additional headway since the trade was placed.
If you look at the figures below, you will notice that one thing is clear, the market is in a short-term overbought state. Almost all of the ETFs I follow for the strategy have moved into an “overbought” to “very overbought” state. This could be the perfect high-probability set-up because not only have many of the ETFs moved into a short-term extreme state, but because the market is moving into a weak seasonal phase.
Yes, historically, December is a bullish month for the market, but the bullish days are heavily weighted towards the beginning and end of the month. Since SPY began 15 years ago, the close of the 3rd day of December through the next two weeks have only been positive 5 times or roughly 33% with an average return of -0.6%. Moreover, the next three trading days are overwhelmingly bearish so given all of the aforementioned I can’t help but think that we are due for a short-term reprieve over the next few days. Typically, Mr. Probability is right when all of the above line up. We shall see if he cooperates this time around.
Short-Term High-Probability, Mean-Reversion Indicator – as of close 12/06/10
* Biotech (IBB) – 54.2 (neutral)
* Consumer Discretionary (XLY) – 78.4 (overbought)
* Health Care (XLV) – 52.2 (neutral)
* Financial (XLF) – 71.3 (overbought)
* Energy (XLE) – 80.5 (very overbought)
* Gold Miners (GDX) – 87.3 (very overbought)
* Industrial (XLI) – 79.4 (overbought)
* Materials (XLB) – 80.6 (very overbought)
* Real Estate (IYR) – 74.1 (overbought)
* Retail (RTH) – 72.5 (overbought)
* Semiconductor (SMH) – 78.5 (overbought)
* United States Oil Fund (USO) – 75.0 (overbought)
* Utilities (XLU) – 56.5 (neutral)
* Gold (GLD) – 85.3 (very overbought)
* Small Cap Bear 3x (TZA) – 18.5 (very oversold)
* Small-Cap Bull 3x (TNA) – 82.3 (overbought)
* UltraLong QQQQ (QLD) – 68.5 (neutral)
* Ultra Long S&P 500 (SSO) – 71.4 (overbought)
* Ultra Short S&P 500 (SDS) – 27.8 (oversold)
* UltraShort 20+ Treasury (TBT) – 47.9 (neutral)
Disclosure: I am Short GDX.