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Sunday, October 4, 2009

The trend may not be your friend this time...

I know that it really isn't proper to do technical analysis on leveraged ETFs. I know that it is always better to analyze an underlying index.

Nevertheless, I was struck by the fact that out of the 25 BUY signals on our Trend Busters list this weekend, fully 23 of them are inverse or inverse leveraged ETFs. In other words, they have all broken above downward-sloping trend lines and are threatening to initiate a new upward trend. Here they are listed below:

SymbolName
DPK DIREXION DAILY DEVELOPED MARKETS BEAR 3X SHARES
EDZ DIREXION DAILY EMERGING MARKETS BEAR 3X SHARES
ERY DIREXION DAILY ENERGY BEAR 3X SHARES
FAZ DIREXION DAILY FINANCIAL BEAR 3X SHARES
DRV DIREXION DAILY REAL ESTATE BEAR 3X SHARES
TYP DIREXION DAILY TECHNOLOGY BEAR 3X SHARES
SEF PROSHARES SHORT FINANCIALS
RWM PROSHARES SHORT RUSSELL2000
SBB PROSHARES SHORT SMALLCAP600
SPXU PROSHARES ULTRAPRO SHORT S&P 500
SMN PROSHARES ULTRASHORT BASIC MATERIALS
DXD PROSHARES ULTRASHORT DOW 30
SIJ PROSHARES ULTRASHORT INDUSTRIALS
EPV PROSHARES ULTRASHORT MSCI EUROPE
JPX PROSHARES ULTRASHORT MSCI PACIFIC EX-JAPAN
SJH PROSHARES ULTRASHORT RUSSELL 2000 VALUE
TWQ PROSHARES ULTRASHORT RUSSELL 3000
SDK PROSHARES ULTRASHORT RUSSELL MIDCAP GROWTH
SJL PROSHARES ULTRASHORT RUSSELL MIDCAP VALUE
SDS PROSHARES ULTRASHORT S&P500
SDD PROSHARES ULTRASHORT SMALLCAP600
SRS PROSHARES ULTRASHSORT REAL ESTATE
RSW RYDEX INVERSE 2X S+P 500

The knee jerk reaction here is to think the market is headed for a major fall if all these inverse ETFs are making such a concerted move upward.

Is there a confirmation found when looking at the SELL signals? In other words, are some of the ETFs based on some on the same underlying indexes showing up as Trend Busters on the SELL side of the equation?

Well, the answer here is yes and no. There are actually quite a few non-leveraged ETFs generating SELL signals on the Trend Busters list, 15 to be exact. The collection is, however, a bit of a hodgepodge. The list of ETF SELL signals is listed below and you can see that there isn't a clear correlation with the inverse ETFs in the list above.

SymbolName
DPD DOW 30 PREMIUM & DIVIDEND INCOME FUND, INC.
EOS EATON VANCE ENHANCE EQUITY INCOME FUND II
EOI EATON VANCE ENHANCED EQUITY INCOME FUND
IYG ISHARES DJ US FINANCIAL SERVICE INDEX
VNM MARKET VECTORS VIETNAM ETF
PKB POWERSHARES DYNAMIC BUILDING & CONSTRUCTION PORTFOLIO
PTJ POWERSHARES DYNAMIC HEALTHCARE SERVICES SECTOR PORTFOLIO
PRN POWERSHARES DYNAMIC INDUSTRIALS SECTOR PORTFOLIO
PWT POWERSHARES DYNAMIC SMALL CAP GROWTH PORTFOLIO
PJM POWERSHARES DYNAMIC SMALL CAP PORTFOLIO
UPRO PROSHARES ULTRAPRO S&P 500
RKH REGIONAL BANK HOLDRS TRUST
KME SPDR KBW MORTAGE FINANCE ETF
IPK SPDR S&P INTERNATIONAL TECHNOLOGY SECTOR
WMH WIRELESS HOLDRS TRUST

Unfortunately, there is enough of a correlation to make anyone worry. We see ETFs tracking the S&P 500, the Dow 30, small caps, financials, real estate and industrials on both lists with the underlying indexes generating the SELL signals and the inverse ETFs generating the BUY signals.

Unless stocks hold at their support levels, these new breakouts could create some ugly trends, ones that will not be friendly to investors.

Disclosure: no positions

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