Oversold ETFs: Is There Contrarian Power In Relative Weakness?

Back on March 11, shortly before the Bear Stearns (BSC) debacle, I wrote about overbought/oversold ETFs. Tops on the sector list had been the financials, retail and semiconductors.

How have things changed for these sectors since the market hit a March 17 intra-day bearish low? For the better or for the worse? Interestingly enough, the results are what a statistician might call, "inconclusive."

Remember, analysts typically make overbought and oversold determinations through the use of the "Relative Strength Index [RSI]." RSI travels between 0 to 100 such that... when things are bearish... an ultra-weak, sub-20 showing may be indicative of a strong buy. (At least that's what contrarians will tell you.)

The previously profiled sectors (financials, retail, semiconductors) are a mixed bunch over the last 6 weeks. Financials and retail remain "oversold" with RSI readings at about the same abysmal level they had been at previously... 3.7 and 6.1 respectively.

In contrast, Semiconductor HOLDR (SMH) has jumped 10 points higher from 18 to 28 in relative strength. Better still, the 1-week, 1-month and 3-month returns are all positive at 1.8%, 3.4% and 9.2 respectively.

Other semi indexes have shown similar progress. For example, even as the RSI reading for the SPDR Semiconductor ETF (XSD) remains below 20 at 15, it has produced 3.8%, 8.2% and 10.2% over 1 week, 1 month and 3 month intervals.

It follows that, when comparing the state of semiconductor ETFs to the market at large since my last look at oversold ETFs, semis are roughly 5% higher than the the SPDR S&P 500 Trust (SPY). Perhaps there's something to the idea that relative weakness in a bearish environ should be seen as a solid buying opportunity.

Unfortunately, the results for financials and for retail are far less encouraging. In spite of the exceptionally oversold conditions that occurred before the Bear Stearns-induced March lows, there has been a moderate recovery for the financial sector (XLF) and the consumer-dependent retailers (XRT). The iShares S&P Global Financials (IXG) did take greater solace in the perception that a crisis may have ended.

Comments

[adan:]

maybe there's a point where a sub-20 reading is a possible good contrarian signal, and where it's there for a more enduring reason

just learning about these sub-etc type readings, so this is just a thought :-)

2008 Apr 24 11:29 AM