Generally speaking, when the going gets tough for traders looking to buy exchange-traded funds (ETFs) on a pullback, the tough buy bonds.
In a world of emerging markets ETFs, and triple-leveraged sector funds, bond exchange-traded funds can be easily overlooked. They tend to be less volatile than their equity counterparts, and their ability to trend like commodity ETFs means that short-term traders, especially mean reversion based short-term traders, often avoid bond ETFs.
At the same time, overbought conditions in stocks have often been accompanied by oversold conditions in bond ETFs like the iShares Barclays TIPS Bond Fund ETF (NYSE: TIP), which finished in oversold territory for a second day in a row ahead of trading on Thursday.
Shares of TIP have been under the control of sellers for the past week. Closing lower for six out of the past seven sessions, TIP has already retreated to levels from which the fund has been able to attract buyers in the past. A similar three-day pullback with two sessions in oversold territory at the end of November, for example, provided for a one-day bounce in the ETF of well over half a percent. An earlier three-day sell-off, this time in mid-November, sent TIP higher for three out of the next four days.
Although not yet in oversold territory, traders may also want to keep an eye on the U.S. dollar, courtesy of the PowerShares DB U.S. Dollar Index Bullish Fund (NYSE: UUP). UUP has finished lower for the past two days in a row, closing down for six out of the past eight sessions, and is likely to find itself oversold before the end of the week on any additional selling.
Lastly, I'm not aware of any negative correlation between biotech stocks and the rest of the equity market when at market extremes. But among the few other exchange-traded funds trading in oversold territory above the 200-day moving average is the iShares Nasdaq Biotechnology Index Fund ETF (NYSE: IBB).
Shares of IBB pulled back by just a fraction on Wednesday, closing lower for three out of the past four days after rallying to their highest levels since August. IBB last traded in oversold territory in mid-November, when a trio of consecutive oversold finishes helped spark a rally in the ETF added more than 7% over the next five trading days.
The ETFs in today's report were drawn from the data and research available through The Machine. To find out more, click here.
David Penn is Editor in Chief of TradingMarkets.com
Disclaimer: The views represented in this column are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.
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