If you followed my advice and hedged using leveraged short ETFs, you have done well in September. The markets have all dropped dramatically, posting the worst one-month loss in over two years. And the carnage is far from over. However, markets do not go up or down in a straight line and we are overdue for a reversal.
RSI (Relative Strength Index) has dropped below 30 and close to its lowest level all year. Typically, when the RSI is stretched either to the up or downside, a reversal is around the corner. Why is that? Well, although drivers for individual stocks are numerous, the overall market trend is driven primarily from two factors: macro (i.e. LARGE factors such as government, Fed policy) and psychology.
RSI is a technical indication of how balanced or one-sided recent market activity has been and points to the psychology of the market. When RSI is driven to low extremes, we start to say the market is “oversold”, meaning bargain hunters (and trend traders) are overdue to start buying. This most recently happened in late June when the RSI reached the low 30s and was followed by a ~20% rise across the board in all indexes over the subsequent 6 weeks.
Reposition
While I do not expect that kind of reaction given recent news and macro events, I am repositioning for a reversal. I have gradually sold most of my short ETFs and have started to go long their opposites. Although this market can certainly go lower in the near term and will undoubtedly go significantly lower before this cycle is over, I am expecting a small bounce.
Buy QQQ, IWM, SPY for unleveraged exposure to the Nasdaq 100, Russell 2000 and S&P 500, respectively. Buy TQQQ, TNA, SPXL for 3x exposure to the same respective benchmarks. Do not go all-in long. FYI, I am still net short. I just do not want to risk what I did in July with my double-down short strategy in the face of oversold conditions.
