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Thursday, July 17, 2008

Does change in ProShares BUY signals indicate sector rotation?

Sometimes it is as instructive to see what sectors are out of favor as it is to see what sectors are in favor.

Recently we posted a list of the strongest BUY and SELL signals found in the family of ProShares ETFs. This earlier post found mostly inverse ETFs generating the strongest BUY signals. This was interpreted as a display of a very negative outlook on the stock market as nearly every sector was represented.

The following list shows those ETFs which, over the last two weeks, have fallen off the earlier list of strong BUY signals

FXPUltraShort FTSE/Xinhua China 25Short International
RXLUltra Health CareUltra Sector
SMNUltraShort Basic MaterialsShort Sector
SZKUltraShort Consumer GoodsShort Sector
SJHUltraShort Russell2000 ValueShort Style
SKK UltraShort Russell2000 GrowthShort Style
SRS UltraShort Real EstateShort Sector
SSGUltraShort SemiconductorsShort Sector

The fact that the UltraShort funds are falling off the BUY list indicates that those sectors are at least showing some improvement. This may not yet signal that investors should buy the corresponding Ultra Long ETFs but it does indicate that this is something that bears watching.

Some of the more interesting aspects of the above list are that small caps, as represented by the Russell 2000 ETFs are perhaps finding some favor among investors as are REITs (SRS) and China (FXP).

Health Care was seeing some favor as a defensive sector but now we see that the Ultra Health Care ETF (RXL) is no longer generating a strong BUY signal. This could also signify that investors are becoming less defensive and more inclined to take on some risk.

And when semiconductors are attracting buyers, you know that risk-taking is definitely back. Witness the UltraShort Semiconductor ETF (SSG) now falling off the BUY list.

As a final word of caution, this list shows ETFs that are no longer generating strong BUY signals. This does not necessarily imply that they are now generating strong SELL signals. This list is meant primarily as an indicator of a potential changing of the guard in terms of leading sectors. Investors should be alert, especially after the rallies we have seen in the last two days.

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