Short-Term, High-Probability Mean-Reversion Indicator: Several ETFs Hit Extreme Readings

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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 another day of gains for the major market benchmarks. Short-term, the major indices look a bit frothy. Three out of the four broad market indices remain in an “overbought” to “very overbought” state. The other, QQQQ, reached extreme levels today and as a result I sent out a trade alert to my subscribers. So far, so good. QQQQ moved roughly $.35 lower and the trade is now 7% higher. If all goes well, this will be the third successful trade in the strategy and would put the High-Probability, Mean-Reversion Strategy over 10% since it was initiated back on Nov. 6th.

Tomorrow brings the much anticipated FOMC meeting which should certainly move the markets. Over the short-term, the bears look like they should have the edge even with the S&P making new highs for the fourth straight session. During the recent advance breadth has been surprisingly low, less than 2 to 1 positive. Typically when this type of price action occurs we will see a decent decline going forward. Actually, when digging a little further, when this type of price action and breadth occurred in the past the S&P had a -2.2% return one month later. The last two times this occurred the market moved over 6.5% lower. I am not certain that we will see this type of move occur going forward, but if the market does happen to move lower I would not be surprised to see the 12/1 gap fill which would be $52.42 in the Q’s.

Short-Term High-Probability, Mean-Reversion Indicator – as of close 12/09/10

Benchmark ETFs

* S&P 500 (NYSEARCA:SPY) – 84.6 (very overbought) / RSI (2) – 99.1
* Dow Jones (NYSEARCA:DIA) –79.1 (overbought) / RSI (2) – 98.1
* Russell 2000 (NYSEARCA:IWM) – 76.4 (overbought)

* NASDAQ 100 (QQQQ) – 69.4 (neutral)

Sector ETFs

* Biotech (NASDAQ:IBB) – 66.1 (neutral)
* Consumer Discretionary (NYSEARCA:XLY) – 59.7 (neutral)
* Health Care (NYSEARCA:XLV) – 58.7 (neutral)
* Financial (NYSEARCA:XLF) – 86.9 (very overbought)
* Energy (NYSEARCA:XLE) – 78.7 (overbought)
* Gold Miners (NYSEARCA:GDX) – 61.5 (neutral)
* Industrial (NYSEARCA:XLI) – 82.5 (very overbought)
* Materials (NYSEARCA:XLB) – 77.5 (overbought)
* Real Estate (NYSEARCA:IYR) – 52.5 (neutral)
* Retail (NYSEARCA:RTH) – 58.9 (neutral)
* Semiconductor (NYSEARCA:SMH) – 54.5 (neutral)
* United States Oil Fund (NYSEARCA:USO) – 60.6 (neutral)
* Utilities (NYSEARCA:XLU) – 65.3 (neutral)

International ETFs

* Brazil (NYSEARCA:EWZ) – 57.2 (neutral)
* China 25 (NYSEARCA:FXI) – 51.6 (neutral)
* EAFE (NYSEARCA:EFA) – 78.1 (overbought)
* South Korea (NYSEARCA:EWY) – 76.5 (overbought)

Commodity ETFs

* Gold (NYSEARCA:GLD) – 54.3 (neutral)

Ultra Extremes

* Small Cap Bear 3x (NYSEARCA:TZA) – 22.3 (oversold)
* Small-Cap Bull 3x (NYSEARCA:TNA) – 75.9 (overbought)
* UltraLong QQQQ (NYSEARCA:QLD) – 69.4 (neutral)
* Ultra Long S&P 500 (NYSEARCA:SSO) – 84.3 (very overbought) – RSI (2) – 98.9
* Ultra Short S&P 500 (NYSEARCA:SDS) – 15.7 (very oversold)
* UltraShort 20+ Treasury (NYSEARCA:TBT) – 63.7 (neutral)

Disclosure: I am short QQQQ.