ETF Expert

Short-sellers and program traders are in charge… for now.

Going into Wednesday’s (8/3/11) session, PowerShares QQQ (QQQ) sat directly atop its 200-day moving average. After falling below the key trendline early, QQQ springboarded to finish with a 1% gain. Or consider the S&P 500 SPDR Trust (SPY). It fell precisely -10% from its April 29 intra-day high to its August 3 intra-day low, then rocketed 2% off its intra-day bottom to close in the green.

Was there an enormous spike in volatility to explain the changes in price movement? Not really. Historically speaking, the CBOE Volatility Index (VIX) jumps above 30 before a major reversal, yet the VIX only made it to 25.

Was there tremendous “buying on weakness” to account for the Dow, S&P 500, and NASDAQ all finishing in the plus column? Nope. An insignificant amount trickled into S&P SPDR Energy (XLE); however, the energy sector was one of the day’s weakest performers.

Simply stated, mechanized trading best explains why the S&P 500 bounced off an all-too-perfect -10% correction mark. Moreover, short-sellers likely covered their trades when the reversal threatened their gains.

In other words, investors should probably view the turnaround as a “relief rally,” not genuine capitulation. In most instances where markets have found a bottom, buying interest (”buying on weakness”) and panic vis-a-vis the fear gauge (VIX) are evident.

Granted, valuations may be more compelling with the S&P 500 at 1260. Nevertheless, the markets are likely to require some Xanax or Clonzapam to alleviate “recession anxiety.”

If selling pressure continues, are there ETFs with a measure of built-in protection for dip-buying? You may want to take a look back at a feature that I wrote during June gloom, “3 Reasons To Consider the Retail HOLDRs ETF.”

You may also want to consider ETFs that not only maintain definitive uptrends, but also boast a spot in the top quartile in relative percentile rank. Out at ETFscreen.com, I screened for unleveraged stock ETFs where 100-day trendlines remained above respective 200-day trendlines AND where relative strength was 75% or higher. Here’s what I found:

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