PowerRatings, Swing Trading and the ETF Market

Turnaround Tuesday more than lived up to its reputation this week, as early strength in stocks – to the tune of Dow futures up more than 300 points in the pre-market – gave way to weakness by the closing bell. The Dow industrials, S&P 500 and Nasdaq all finished the day in the red.

Yesterday I noted that the number of 9- and 10-rated stocks in our Top 25 PowerRatings roster was decidedly subpar. As of Wednesday, the roster is little improved – if at all. In fact, even among the sizable ranks of 8-rated stocks – stocks that our research indicates are still likely to outperform the average stock by a margin of more than 8 to 1 after five days – I found a large number of short and leveraged short exchange-traded funds. And while I typically stick to stocks in these reports, the potential opportunities in these ETFs merit mention.

Exchange-traded funds represent baskets of stocks that can be traded as a unit. These baskets may be based on markets such as the S&P 500, sectors such as financial stocks, or even entire countries such as Brazil or India. One of the reasons why ETF trading is so popular is that ETF trading removes what is called "corporate risk."

Corporate risk is the possibility that any one stock – any one corporation – will disproportionately impact a portfolio’s performance. So, while a trader who owns shares of, for example, Lehman Brothers, runs the risk that Bear Stearns will go belly up, a trader who owns, for example, the Select Financial Sector SPDRS exchange-traded fund, XLF, will suffer far less by comparison. That is because, in addition to Lehman Brothers, an ETF like XLF consists of and will represent a number of different financial stocks. An ETF, in other words, provides instant diversification.

Another plus for many ETF traders is that ETFs tend to be less volatile than individual stocks. In a market that has seen its volatility skyrocket in recent months and weeks, this aspect of ETFs has been one that traders have increasingly sought out.

But in most other respects, ETFs behave like stocks – including having Short Term PowerRatings that can clue us in on when these ETFs are oversold and potentially attractive as buying candidates. Because ETFs can be bought, sold and sold short with the same ease as stocks, they are a great fit with our Short Term PowerRatings for swing traders looking for a little less risk and a little less volatility than our market has been providing.

Here are three exchange-traded funds, all with Short Term PowerRatings of 8 and – as far as ETFs are concerned - low, 2-period RSIs. Interestingly, all three are also a relatively new form of exchange-traded fund called an inverse fund, which tracks the opposite of an index or sector. For example, if the S&P 500 fell by 2%, an inverse ETF – or short ETF – would rally by approximately 2%.

ProShares UltraShort S&P 500 (SDS | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 25.40

ProShares UltraShort FTSE/Xinha 25 (FXP | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 21.60

ProShares UltraShort MSCI Japan (EWV | Quote | Chart | News | PowerRating) Short Term PowerRating 8. RSI(2): 18.01

Note also that as "Ultra" funds, all three ETFs are not only short or inverse but also leveraged 2 to 1. This, of course, magnifies the potential for both gain or loss and swing traders should take this into account when considering these sorts of ETFs as potential trading candidates.

Does your stock trading need a tune-up? Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days.

Whether you have a trading strategy of your own that could use a boost or are looking for a way to tell the stocks that will move higher in the short term from the stocks that are more likely to disappoint, our Short Term PowerRatings are based on more than a decade of quantified, backtested simulated stock trades involving millions of stocks between 1995 and 2007. Click the link above or call us at 888-484-8220, extension 1, and start your free trial today.