Will UltraShort ETFs Experience Whiplash Again?

In a March 11th column on beaten-down financials/consumer stocks/semiconductors, I discussed the ways in which analysts determine whether an investment is technically "overbought" or "oversold." They make the determination through the use of a "Relative Strength Index [RSI]."

RSI travels between 0 to 100. An ultra-weak, sub-10 showing may be indicative of a strong buy. Similarly, an ultra-strong 90+ score may be an opportunity to take profits (i.e., sell).

In this bear market environment, shorting financials, consumer services and semiconductors has been a popular move. Indeed, the move is as popular here on August 21 as it was back on March 11. The Relative Strength [RSI] scores for ProShares UltraShort Financials (SKF), ProShares UltraShort Consumer Services (SCC) and ProShares UltraShort Semiconductors (SSG) are  99, 95 and 94 respectively.

Yet, even as the popularity has increased vis-a-vis volume and RSI scores, the profitability of buying the UltraShorts seems to be waning. Moreover, the volatility and the "overbought" status are suggesting that risk outweighs the reward.

Notice how "ultra-shorting" financials after March 11 led to 30% losses through mid-May. The same held true for ultra-shorting semiconductors.

Of course, when the markets nose-dived in June/July, ultra-shorting the reliably weak sectors of financials, semis and consumer stocks became profitable once more. (From mid-July forward, the ultra-shorting has been ultra-heart-breaking.)

All totaled, ultra-shorting weak areas of the market when RSI numbers top 90 isn't great "timing." It follows that... at least for today... ProShares UltraShort Financials, ProShares UltraShort Consumer Services and ProShares UltraShort Semiconductors are  technically "overbought."

Traditional trendlines are less clear on the matter. SKF is still above its long-term trend... thank you Fannie/Freddie. However, ProShares UltraShort Consumer Services and ProShares UltraShort Semiconductors are below/hugging the 200-day mark.

I will be discussing a host of current ETF issues on my "In the Money" radio program this weekend. Feel free to tune into the ETF Expert/"In the Money" Radio Podcast anytime... and get your investing guidance when you need it!

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[andyn:]

Buy puts on SKF. I think once the Fannie/Freddie uncertainty is over, this stock is gonna drop like a rock below 100.

2008 Aug 22 09:16 AM

[Seth Wu:]

The general statements are fine, but the specific reference to their RSI's being in the high 90's is very confusing to me.

SKF opened lower today, but my Fidelity Active Trader indicators show maybe overbought only on stochastics at 75 (which is known to be inaccurate when a stock is trending as during period from May to July), and RSI is merely 53 (a high since July 16, and not at all overbought). When did RSI ever get to 80, not to say 99?

2008 Aug 22 10:17 AM

[kkin365:]

Could someone give me a briefing on how SKF mimicks financials on the double downside? What key financial stocks should one follow to assess SKF's likely movements?

2008 Aug 22 02:19 PM

[zptdo:]

SKF shorts stocks in DJUSFN aiming for double inverse of the index:
djindexes dot com/mdsidx/?event=show...

On Aug 22 02:19 PM kkin365 wrote:

> Could someone give me a briefing on how SKF mimicks financials on
> the double downside? What key financial stocks should one follow
> to assess SKF's likely movements?

2008 Aug 22 02:32 PM

[2houndz:]

ZPTDO - SKF seems to follow C and BAC very closely, but with a lag of a few minutes. Transpose all 3 graphs on one another and it's uncanny. If C and BAC go down, buy SKF. When they reverse, buy UYG.
Also, look at SKF on a weeky chart with 50 DMA. The support is fairly obvious. ANDYN may be correct that when FRE and FNM get a fix, this thing is going down, but no matter. It's not a keeper, the beauty is in the volatility.

2008 Aug 22 08:42 PM