August 21, 2014

Market Enters One of the Weakest Parts of the Year in a Short-Term “Very Overbought” State. Short-Term Reprieve Ahead?

Twenty out of the twenty-nine ETFs that I follow in the High-Probability, Mean-Reversion strategy have moved into a short-term “overbought” to “very overbought” state. Typically, when we see this type of short-term reading a1-3 day reprieve is right round the corner.

There are several potentially bearish signals in the making right now. For one, all of the major market benchmarks are struggling with strong overhead resistance. Also, as I stated yesterday, we have two unclosed gap from 2/1 and 2/7 that are weighing on the market.

Moreover, with the exception of tomorrow (11th trading day), the rest of the month is overwhelmingly bearish on a seasonal basis. On a historical basis, the 12th through the 16th trading days in February are one of the weakest stretches for the market over the course of the year. With all of the short-term bearish signals currently residing in the market I think history could repeat itself once again this year.

Couple all of the aforementioned with yesterdays quote from Jason Goepfert, “the last 3 Cisco earnings reports, each of which saw the stock get hit hard the next morning, also coincided pretty closely with the last three corrections in stocks in general (mid May, August and November).  Over the 10 days following those reports, the S&P 500, at its worst point, lost -11.1%, -4.6% and -3.7%” and again the bears could be quite successful over the short-term.

Today did not do much for the current position in the High-Probability, Mean-Reversion strategy. The week of options expiration started out with sideways trading although  expect volatility to pick up as the week moves on. It could be a very interesting week for the market.

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Short-Term High-Probability, Mean-Reversion Indicator – as of close 2/14/11

Benchmark ETFs

* S&P 500 (SPY) – 83.5 (very overbought)
* Dow Jones (DIA) 85.0 (very overbought )
*Russell 2000 (IWM) – 83.0 (very overbought)
* NASDAQ 100 (QQQQ) – 83.6 (very overbought)

Sector ETFs

*Biotech (IBB) – 64.6 (neutral)
* Consumer Discretionary (XLY) – 77.3 (overbought)
* Health Care (XLV) – 73.0 overbought)
* Financial (XLF) – 76.8 (overbought)
* Energy (XLE) – 78.7 (overbought)
* Gold Miners (GDX) – 58.3 (neutral)
* Industrial (XLI) – 84.9 (very overbought)
* Materials (XLB) – 78.2 (overbought)
*Real Estate (IYR) – 80.7 (very overbought)
* Retail (RTH) – 55.7 (neutral)
* Semiconductor (SMH) – 81.1 (very overbought)
* United States Oil Fund (USO) – 20.7 (oversold)

* Utilities (XLU) – 33.7 (neutral)

International ETFs

* Brazil (EWZ) – 55.7 (neutral)
* China 25 (FXI) – 42.8 (neutral)
* EAFE (EFA) – 58.1 (neutral)
* South Korea (EWY) – 23.8 (oversold)

Commodity ETFs

* Gold (GLD) – 62.6 (neutral)

Ultra Extremes

* Small Cap Bear 3x (TZA) – 16.8 (very oversold)
* Small-Cap Bull 3x (TNA) – 83.1 (very overbought)
*UltraLong QQQQ (QLD) – 82.6 (very overbought)
* Ultra Long S&P 500 (SSO) – 82.6 (very overbought)
* Ultra Short S&P 500 (SDS) – 17.8 (very oversold)
* UltraShort 20+ Treasury (TBT) – 46.8 (neutral)

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Kindest,

Andy