With early strength pushing ETF markets higher in the first few hours of trading on Tuesday, there are fewer and fewer exchange-traded funds with top ETF PowerRatings of 9 or 10.
Why do we look for the top-rated ETFs? Our research into exchange-traded funds going back to 2003, shows that those ETFs that earn ETF PowerRatings of 9 have made significant short term gains more than 77% of the time. Those ETFs that have earned our highest ETF PowerRating of 10 have made those gains nearly 80% of the time.
When markets shift into correction mode, and panic is the name of the game in the financial media, our research suggests that it remains a sound, short-term trading strategy to buy those markets ("buying the selling" as Larry Connors, CEO and founder of TradingMarkets and developer of ETF PowerRatings puts it), and then to sell them back into strength after the profit-taking (and panic) subside.
This mean reversion-based trading strategy is one that has not only been quantified by our testing (testing that involved thousands of simulated ETF trades), but is also supported by the success of professional traders for decades, who have known that, in the short term, buying pullbacks beats buying breakouts.
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Let's take a look at two ETFs that still are sporting high ETF PowerRatings going into trading today on Tuesday.
The iShares Dow Jones Broker-Dealer Index Fund ETF ( IAI | Quote | Chart | News | PowerRating) has earned an ETF PowerRating of 9 as of Monday's close and is moving lower in early trading on Tuesday.
IAI has closed in oversold territory for three days in a row going into Tuesday, marking the fund as especially oversold. In fact, over the past three days, IAI has displayed a 2-period RSI of less than 10.
The other exchange-traded fund for today's report comes from the biotechnology sector: the S&P Biotechnology SPDR ETF ( XBI | Quote | Chart | News | PowerRating)
XBI, like IAI above, has earned an ETF PowerRating of 9 going into trading on Tuesday. Down three out of the past four trading days, XBI's 2-period RSI slipped below 10 as of Monday's close and is continuing to move lower.
Isn't it time you gave PowerRatings a try? Our top-rated ETFs have been correct nearly 80% of the time since 2003. Click here to launch your free, 7-day trial to our ETF PowerRatings today!
David Penn is Editor in Chief at TradingMarkets.com.
