Oversold List Shows Market at Tipping Point

The next ticker is part of a group that uncomfortably populated my results for the last week: leveraged ETFs. These are not really equities like most stocks. They are financial trading instruments that are more or less Frankensteins of the equity world.

I am not a big fan of leveraged ETFs, so I rarely mention them; other than warning investors to stay clear. Leveraged ETFs are a great way to make money, if you're the underwriter for them. Otherwise, I consider the product an unintended consequence of SEC pattern daytrader regulations.

The only way I know of to guarantee making money on Wall Street is to short leveraged ETFs. It's the same reason why it's hard to find shares, and when you do find shares, you can't count on holding on to them when you need to.

FAZ data by YCharts

Direxion Daily Financial Bear 3X (FAZ)

Background: The Financial Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Financial Index. Direxion Daily Financial Bear 3X trades an average of 10.2 million shares per day with a marketcap of $680 million.

52-Week Low: $16.04

Trying to make sense of the fair value for leveraged ETFs is like asking my three-year-old to figure out Chinese algebra. Unfortunately, my son is likely to give an answer that more closely resembles reality.

Why is the Financial 3X bear "Faz" showing up if the fair value isn't relevant? On the weekly chart, we have several oversold market timing indications. One is based on a variation of legendary market timer Tom DeMark's TDCombo. DeMark's work can be found in places like Bloomberg, Thomson Reuters, and other professional grade investment sites.

DeMark is an advisor to SAC Capital Advisors and other big money in the industry. In a nutshell, he isn't the type of trader you want for a counter-party. If you're interested in learning more about his timing indicators, find a copy of DeMark Indicators by Jason Perl or one of the many books DeMark wrote.

Technically, based on a weekly chart and now on the daily chart, FAZ appears ready to bounce. Since FAZ is a leveraged bear, it trades with an inverse relationship to the financials that are represented. If it moves up, which appears likely, financials are expected to move lower. While FAZ is a 3X product, the actual trading relationship isn't 3 to 1, but the point is the same. Financials may be poised for a breather.

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