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:
|5 ETFs TO Consider For The Dips||¬†||¬†||¬†||¬†||¬†|
|¬†||¬†||¬†||¬†||100-Day||200-Day||¬†||RS % Rank|
|iShares DJ Pharmaceuticals (IHE)||72.4||70.5||¬†||84.1%|
|Vanguard Consumer Staples (VDC)||79.7||78.6||¬†||83.2%|
|iShares FTSE Residential REIT (REZ)||43.5||42.7||¬†||81.0%|
|PowerShares SmallCap Utilities (PSCU)||29.8||29.3||¬†||81.0%|
|First Trust NASDAQ 100 Ex-Tech (QQXT)||23.2||23.0||¬†||79.5%|
Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.