Buying the Selling in Korea, Hong Kong and Japan

Like a number of other markets, Asian ETFs representing countries like South Korea, Hong Kong and Japan began to sell-off aggressively in late February heading into March. These ETFs had become short-term overbought as they resumed the rallies that brought them up from bear market territory, and were increasingly due for profit-taking.

The profit-taking in these funds, ETFs like the iShares MSCI South Korea Index Fund ETF (NYSE: EWY) and the iShares MSCI Hong Kong Index Fund ETF (NYSE: EWH) sent these ETFs lower for three days in a row. Even the iShares MSCI Japan Index Fund ETF (NYSE: EWJ) sold off for four out of five days to finish lower by nearly 2%.

Importantly, these sell-offs not only took these ETFs into technically oversold territory and to new, short-term lows. Additionally, these pullbacks were enough to give all three funds significant ratings upgrades that helped alert traders and more active investors to the potential possibility of near-term outperformance in these exchange-traded funds.

For example, after closing lower for three days in a row above the 200-day moving average, shares of the EWY earned “consider buying” ratings of 9 out of 10. This meant that the ETF had pulled back to levels where traders have tended to come off the sidelines to buy. Not only EWY, but also shares of the EWH also earned 9 out of 10 ratings after a three-day pullback too the stock into short-term oversold territory. Also earning 9 out of 10, “consider buying” ratings was the iShares MSCI Japan Index Fund ETF or EWJ.

When trading began on Wednesday, then, all three of these Asian ETFs were already deeply oversold. And as has been the case historically, these extremely oversold conditions began to lure buyers into the market. Interestingly, even as these ETFs began to advance as traders and active investors began to take advantage of the depressed prices, the EWY, EWJ and EWH all earned “consider buying” ratings for a second day – typically, 8 out of 10 rather than 9 out of 10, but still well within that category of ETF that historically as performed very well in short-term.

As of Thursday’s close, most of these Asian ETFs had rallied into strength, finishing above their short-term moving averages and returning to short-term overbought status. The EWY added more than 2%, while both the EWJ and EWH gained more than 1% on Thursday alone.

To highlight the performance of Asian ETFs ex-China is not to understate the strength in many of the funds representing Chinese stocks. Up more than two percent on Thursday and following-through to the upside were both the Guggenheim China Small Cap ETF (NYSE: HAO) and the Guggenheim China Real Estate ETF (NYSE: TAO).

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David Penn is Editor in Chiefof TradingMarkets.com