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3 ETFs With Momentum

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( ETF Expert) -- There are a variety of ways to interpret stock market volatility. A rising CBOE Volatility Index (VIX) often typifies greater fear on the part of options investors such that they require protection against a monstrous selloff. A widening of the daily trading range on a popular benchmark may also be indicative of explosive moves to the downside or upside. Moreover, upward revisions to the average beta (think financials) can signal increasing risks to the broader markets as well.

Relative strength is a lot like volatility in that there are different approaches for evaluating and discussing momentum. Some technicians use the Relative Strength Index (RSI) for looking at potentially overbought or oversold investments. An asset with an RSI above 70 may be viewed as "overbought" whereas one with a RSI below 30 is typically viewed as "oversold."

In contrast, the folks at ETFscreen.com developed a proprietary Relative Strength Factor (Rsf) that ranks any individual ETF in relation to the entire population. The 0-100 percentile ranking lets the investor identify whether the ETF is in the top half with a score over 50, the top quartile with a score above 75, or perhaps in the top decile witha score over 90. Indeed, many momentum investors often like to purchase fast-movers with the highest Rsf scores.

However, buying the hottest funds during a given week may not account for movements over time. For me, I am more intrigued by ETFs that may have had average momentum three months earlier (with a score near 50), but have steadily climbed the charts to land in the top 10% of all ETFs. Fortunately, the folks at ETF Screen offer weekly interval data to see the development or breakdown in momentum (i.e. "Rsf" over time).

In truth, there haven't been many hidden gems in 2012 thus far. If anything, momentum breakdown has been more typical in recent weeks, particularly in energy, precious metals and pockets of the emerging-market space. For instance, PowerShares Small Cap Energy (PSCE) moved from the 75th percentile down to the the 20th percentile, while PowerShares Precious Metals (DBP) plummeted from the 90th percentile all the way down to the bottom 1/3 of all exchange-traded funds (31.3).

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