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 to Accumulate and Buy SDS (Double Short S&P 500) after Breakout for a Trade?

If you look at the chart of SDS above, you might see a stock that is worth buying on the long side (profit when the stock goes up). SDS appears to have had strong resistance at around $59 and SDS has tested the resistance at least three times within the last year. Then early January 2008, SDS appears to have broken out.

As of February 28, 2008, SDS is pulling back towards the 50 day moving average. Some traders, and institutions such as Investors Business Daily, suggest to buy breakouts or if not at the breakout, to buy a stock after a breakout as it pulls back to the 50 day moving average (for a trade).

This appears to be the case now as SDS has broken out and has pulled back to the 50 day moving average with current resistance of $72.55.

Now what if you knew that SDS is really the Double Short S&P 500 Proshares.com ETF. On a given day, for every 1 percent that the S&P 500 index goes down, SDS goes up approximately 2 percent.

This means that there might be more downside ahead in the stock market (more upside in SDS), at least for a trade.

Today's Chart

A few days ago, Dan Fitzpatrick of TheStreet.com appeared on CNBC's Fast Money show to show the chart of SDS. He made a point that many investors are more used to buying on the long side. So when we show the chart of SDS, the stock chart appears to be a solid buy.