BigTrends

The CBOE Equity Put/Call Ratio hit the lower extreme on Monday, which means there were an extreme number of calls purchased relative to puts. Based on the contrarian viewpoint this is a strong sell signal on the markets. In my view, I’ve found the Equity Put/Call Ratio (EPCR) extremely valuable in helping define short-term tops and bottoms.

Of all put/call ratios the EPCR is the best to use because it only looks at equities and excludes options traded on indices and ETFs (including inverse)—this provides a direct look into what market participants are thinking.

The CBOE provides this info for free on their website but the hard part is tracking this on a daily basis and defining the upper and lower extremes. I use Bollinger Bands to define the extremes. It’s simple a spike above the upper band is extreme fear (market bottom) and a spike below the lower extreme signals complacency (market top).

Here’s yesterday’s chart – you can see that complacency was reached with a reading of 39%! Historically, any level under 55% is considered complacent. The last time the EPCR was recorded at this level was on April 15, 2010 and that was an excellent short signal (on chart below).

CBOE Equity Put/Call Ratio (click to enlarge)

Trade well,
Andrew Hart - ETFTRADR

Disclosure: no positions

It’s time for another ETF trend summary  and this time for July (oh how time flies)… Major indices posted the first monthly gain since April of this year led primarily by industrials (XLI) and energy (XLE). After a two month hiatus from gains we saw just about all prevailing trends reverse during July. As it stands for the close of July the market is marginally down year to date with Small Caps (IWM) posting the best index performance up nearly 5% thus far.

Take a look at the ETF heat maps below – we’re looking at July performance alone and YTD of some of the most prominent ETFs. As you can see the one month heatmap is painted in green, while the YTD is just about unchanged with exception to the extreme underperformers and extreme outperformers. As usual the brightest blocks are usually leveraged ETFs.

US Sector ETFs

* Materials led the way in US sectors growth with oil servicers not far behind. Other notable leaders include transportation and industrials.
* Healthcare (XLV) was a dead weight pulling down pharmaceuticals (PPH) as well.

Commodity ETFs

* The super star in commodities is no longer Gold, but all things agriculture (DBA). The outlier is Sugar (SGG) up nearly 23% in one month. In addition, growth dependent metals like, Copper (JJC) and Aluminum (JJU) recovered
* Perhaps the biggest, most useful news took place in oil.  Oil (USO) gained ground for a second month and looks to be headed to the top of its monthly range. The price pattern looks supportive of USO gaining 15% or more over the next 2-3 months.

Currency ETFs

* Around the world the top performing currency of all the majors was the Australian dollar (FXA) while the US Dollar performed as one of the worst.
* To date the Japanese Yen (FXY) is best performer for 2010

International ETFs

* As others have pointed out, Latin America is en fuego right now and some of the best performers in the world are Brazil (EWZ, BRF) and all of Latin America (ILF)
* Not all BRIC countries are participating. China (FXI) was underperformed the US (SPY) in July while India (EPI) failed to participate in the rebound at all.

ETF HEATMAP (July Performance) –


ETF HEATMAP (YTD Performance)

Want More to Learn More about ETF Trading? Subscribe to ETFTRADR Today

As we all know Global indices took a nose dive in May and the short-term bottom finally took hold May 25, roughly one month ago. Since the mild recovery the Vanguard Global Index ETF (VGK) has gained 12% and the SPDR S&P500 6.7%.  Both are solid moves in under a month but overall the S&P500 is lagging emerging markets. Even with a surprise change in currency policy (and a surge in equities) China has underperformed its BRIC peers like Russia (RSX), Brazil (EWZ) and India (EPI). 

The true leader of the global rebound is Latin America. There are 20 countries that comprise Latin America, most of which are not revered for their economic prowess, however, a broad based trend has emerged giving this area the leg up in recent market performance. Let’s take a look at the ETF leaders:

In the chart below we have the top 20 ETFs sorted by 1 month performance – to keep it true we do not include inverse or leveraged ETFs. 30% of the top ETF performers are Latin American ETFs providing the largest chunk of gains of any geographic location. Interesting enough another strong geo-location is South East Asia & Australia with Indonesia (EWA), Australia (EWA) and Thailand (THD) with 15% share of the top 20.

Brazil is the clear leader of leaders with two ETFs in the top 5 performers including Small-Caps (BRF) and large-caps (EWZ). (In case you cannot decide on BRF or EWZ, a new Brazil Mid-Cap ETF started trading on Tuesday with ticker BRAZ.) Next are two diversified Latin American ETFs, GML and ILF – both are heavily invested in the top economies Brazil, Mexico and Chile. Chile (ECH) and Mexico (EWW) round out the list of top performers.

Given the dependence on energy and basic materials in these economies it’s no surprise to see the Coal and Steel ETF make an appearance, although Oil remains out of the picture. If the trend continues and leaders continue to lead (which they tend to do) then we could see oil (USO) outperform over the next month closing the performance gap.

Click to Enlarge

Want More to Learn More about ETF Trading? Subscribe to ETFTRADR Today

Update at bottom of post...

Looking back at the S&P500 and the flash crash the major market index has tested support and resistance three separate times. Typically, the more times a key level of support or resistance is tested the weaker it becomes.  I've found that three times is a key number of tests to watch - if a key level is tested three times it is exponentially more likely to break that test.  Of course, this has just been an observation of mine over the past several years in my trading so we'll continue to watch and see what happens. 

Since this range is most evident on a 60 minute chart (SPY), I would focus on ETF options on the SPY or other major market index (QQQQ, IWM, DIA).  To play the expected breakout or breakdown look for a confirmed trend or two consecutive closes outside the range.  For example, two hourly closes above SPY $111 would indicate a breakout so ETF options traders could look at July 108 Calls.

SPY (60 Minute Chart) - Click to Expand

UPDATE:  Looks like Tuesday's rally was strong enough to confirm above the $111 level, so that level is now support in my view.

Looking back at the S&P500 and the flash crash the major market index has tested support and resistance three separate times. Typically, the more times a key level of support or resistance is tested the weaker it becomes.  I've found that three times is a key number of tests to watch - if a key level is tested three times it is exponentially more likely to break that test.  Of course, this has just been an observation of mine over the past several years in my trading so we'll continue to watch and see what happens. 

In the past 14 days the S&P500 has shed 7% of its value so many investors are starting to look for value in beaten down equities. Of course, others still believe this is the start of a new bear trend… In either case, here’s a list of the most overbought and oversold ETFs.

It was a decisively bearish May for the market and also a memorable one. The DJIA had its biggest monthly drop since in February 2009 and the biggest May point drop in DJIA history (worst % loss since 1962). As we do each month let’s step back and take a look at what major trends emerged or faded during the previous month. In many cases this can provide an good perspective into the next 30-60 days.

Take a look at the ETF heat maps below – we’re looking at May performance alone and YTD of some of the most prominent ETFs. As you can see the May heatmap is covered in bright red, while the YTD is just about unchanged with exception to the extreme underperformers and extreme outperformers. As usual the brightest blocks are usually leveraged ETFs.

Here’s what I see (sound off in the comments below if you notice anything else!):

Yesterday I received the following documents from one of my brokers and since I only received it from one there's a good chance you have not seen it yet.

For those of you that trade Leveraged ETFs like Direxion's 3X Bull/Bear ETFs or ProShares UltraShorts effective April 30 FINRA has raised the margin requirements needed for trading on margin. This was announced several months ago, but now it's happening and in my view, it's a move in the right direction. Don't forget there's a class action suit being filed against broker-dealers (IAI) regarding the misrepresentation of leveraged ETFs.

Since the market volatility spiked to all time highs in 2008 traders and investors alike witnessed the power of these leveraged vehicles. It displayed option-like opportunity with stock 'security' that investors perceived to be less risky, which is not generally correct. In short, leveraged ETFs have become a rookie magnet in trading (I suppose the recent bull market has made them all geniuses). Bottom line, whether you are a seasoned trader or just beginning it's important to know everything about your trading vehicle of choice.

That said, if you're trading leveraged funds I recommend the following:

• Max holding period of 1 week (many would say 1 day)
• Focus on 60 minute charts our less (I prefer 60 & 15)
• Execute a time stop - leveraged traders need velocity - in other words, if the ETF is not moving exit in a specified period of bars
• Focus on core group of Leveraged ETFs: If you're trading options your list will be different than the stock trade based on the current price [define your list]

We’re back again with a quick wrap-up of the major trends that drove the market in the final month of the 2010 Q1. It was the strongest month since November not to mention we saw a few reversals take place after the January and February ETF Trends took hold. (You can click on the images to enlarge)

Let’s first take a look at the big movers from countries to sectors to commodities:

The currency markets are in turmoil this morning as Greece is bailed out.  As expected the Euro is facing increased selling pressure and is currently off 1%, which places it near 10 month lows.  In contrast, the US Dollar has achieved a quid pro quo and is up 1% on the news and is near 9 month highs.  

Today's impact is significant on both currencies -- It looks like the US Dollar Index ETF (UUP) is breaking out based on recent price action.  In testing those 9 month highs UUP has moved well above its 50 day moving average while the same moving average has now crossed and confirmed above the 200 day moving average.  As of now, the up trending channel shows resistance at $24.25 on UUP, perhaps this is the target for many long USD traders. 

If nothing else, we'll see commodities, like oil (USO) and gold (GLD) fall on the strength of the US Dollar.  

PowerShares US Dollar Index Bullish (Prefer inverse ETFs? UDN is $ Bearish Index) – Click to Enlarge