Reversion to the Mean Trade on SRS: Double Short Real Estate ETF?

In the Previous Post, this blog speculated how far this rally could go.

The S&P 500 rally does appear to be stalling, after being severely underneath the 50 day and 200 day moving average. Over the last several months, the S&P 500 has broken above the 50 day moving average, and approached the 200 day moving average (200 Day Moving average was approximately 950, and the S&P 500 reached 930).

Now as we look at several sector ETFs (Exchange Traded Funds), we notice that some are severely underneath the 50 and 200 day moving average.



The SRS ETF, the Proshares Double Short Real Estate ETF, is currently at 24.56. The 50 Day Moving Average is currently at 44.73 and the 200 Day Moving Average is 77.82.

This means that currently, SRS (a very volatile ETF), is 45% below the 50 day moving average and 68% below the 200 day moving average. These are very large percentages below the moving averages.

Maybe it is time for the reversion to mean trade on some ETFs such as the SRS?

Time for a Stock Market Short Covering Rally?

The Stock Market as represented by the S&P 500 has been going down for sometime and the S&P 500 is now at 970.97.

Is it time for a (short covering) rally?

The current levels appear to be low enough for some bargain hunters to step in, and the shorts to start covering, starting a rally.

1. The S&P 500 (as of close of Wednesday, October 8) when displayed on a Point and Figure Chart , shows a Bullish Pattern, the Long Tail Down. (BULLISH)
   
2. The Stocks above 50 Day Moving Average is an extremely low 1.20% (BULLISH)
   
3. The Stocks above the 200 Day Moving Average is an extremely low 4.20% (BULLISH)
   
4. The New High Low Index ($RHSPX) is a very low 0! (BULLISH)
   
5. The Ratio of Stocks Above 200 day Moving Average to Stocks Above 50 Day Moving Average spiked to a very high 3.5 (BULLISH)
   
6. The S&P 500 is overextended from the 52 week high and is down around 38%. This is a rare occasion and one year forward returns at these levels have been market beating returns. We have not been at these levels since the great bottom of 1974. The over extension is even worse than the bottoms in 2001-2003, 1987, and 1970. (BULLISH)
   

Maybe it is time to trade or accumulate stocks or equities for the long term?

Biotech Breakout?

Over the past several trading days, we noticed that there is positive activity in the bio tech sector.

Amgen (AMGN), over the past four trading days has gone from $47 to $50, a gain of around 6%. The stock has broken out above the 200 day moving average too.

Celgene (CELG), over the past four days has gone from $64 to $69, a gain of around 8%. The stock has broken out above previous resistance levels and is solidly above both the 50 and 200 day moving average.

Genentech (DNA), had broken out, but a recent NY Times Article knocked down the stock today. However, on today's CNBC Mad Money Show, Jim Cramer pushes the Genentech stock and is bullish on bio tech at this part of the cycle.

Gilead (GILD) has shown some recent weakness, but the stock is still above the 200 day moving average and is within 9% of the 52 week high.

Stock Market (S&P 500) Short Term Positive, Intermediate Term, Still Bearish

After today's S&P 500 breakout above the 50 day moving average and short term downtrend, the stock market should have some short term momentum.

The S&P 500 is currently around 1350.



Next resistance area is around 1400 on the S&P 500.

Intermediate term, the S&P 500 is still on a downtrend. The S&P 500 is still below the 200 day moving average.

But let us see how the market performs as the S&P 500 reaches initial resistance (1400).

We might be in a trading range short to medium term, but looking towards the end of the year, it is still possible that we will still break down below 1270 on the S&P 500 based on a 5 year view of the S&P 500.

Today's Chart

Are we almost at bottom on S&P 500?

The S&P 500 Index (500 of America's most influential and largest companies) $SPX fell 2.33% to 1482.66. Are we near the bottom?

Based on the $SPXA200R and $SPXA50R indicators, we are nearing the bottom.

The $SPXA50R refers to the ratio of stocks in the S&P 500 that are above the 50 day moving average. We use this indicator as a contrarian indicator. When the $SPXA50R goes around the 20% area (meaning 20% of stocks in the S&P 500 are above the 50 day moving average), we are near or at the bottom. Right now, the $SPXA50R are almost at 20%.

The $SPXA200R refers to the ratio of stocks in the S&P 500 that are above the 200 day moving average. Again, we use this indicator as a contrarian indicator. When the $SPXA200R goes below 50, and around the 45% area, we are near or at the bottom. Right now, the $SPXA200R is slightly above 50%. A little bit more, and we should be at the bottom.

Check on Today's Status/Chart

To update yourself on the $SPXA50R and $SPXA200R, use this chart.

Current Support Levels

To help put the $SPXA50R and $SPXA200R indicators in perspective, take a look at the current support and resistance in the S&P 500.

Stock Chart: LVLT (Level 3 Communications) has broken uptrend line? (June 15, 2007)

Level 3 Communications (LVLT), has been on a nice 2 year uptrend. However, recently, it looks like it has gone below the two year uptrend.

Looking closer at a 5 month chart:



We see that LVLT is underneath both the 50 and 200 day moving average, a bearish sign. Another bearish sign is that the 50 day moving average looks like it is about to go under the 200 day moving average (The Death Cross ).

The only positive I can see is that the stock has not breached the $5.20 support yet.


Note on Trend Lines:

Yes, give a chart to several chartists, and they may draw trend lines a bit differently. However, in the case above, the trend line looks correct, as the line is validated by six different points along the line. The Trend line also nicely supports the 200 day moving average.

Alternate Plays/Charts

Alternatively, Corning Incorporated (GLW), might be a good Alternative Play (Annotated Chart)

Stock Chart: BTU, Peabody Energy, Coal Company is Coming Back

Peabody Energy (BTU) is a Coal Company. For one year, from around May 2006 to early April 2007, BTU had been on a downtrend. Then on April 2007, it spiked up on good volume, breaking the one year downtrend line, and has gone above the 50 and 200 day moving average. This would have been a great Buy Point.

This jump in Peabody Energy (BTU) also coincided with the time that Warren Buffett had been buying the rails. Jim Cramer has said suggested that this play is an indication that Coal is not over .

Even if you didn't catch that point, the 50 day moving average has moved above the 200 day moving average, which is a bullish sign. BTU is also above previous resistance of $48.46, and has broken out of a Dec 2006 to April 2007 Bullish Cup and Handle pattern. BTU is also above both the 50 and 200 day moving average.

Even if you didn't catch BTU at the ideal buy point, you still may be able to catch BTU's run, as the new uptrend is still intact.