As U.S. stocks sit somewhere between 3-5% off of their highs, depending on which market you're looking at, bullish sentiment in equities is not nearly as strong as it was just a couple months ago. The S&P 500 is trading closer to its 200-day moving average today than it has since July 2020 and with the Fed looking to tighten conditions soon, it makes sense that investors have pumped the brakes a little bit on their enthusiasm.
Some segments of the market, however, are looking short-term oversold. Since investing is often a game of mean reversion, there are potential short-term opportunities to be captured here.
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Here are three ETFs whose relative strength indicator (RSI) is currently below the key 30 level.
iShares Biotechnology ETF (IBB)
When cyclicals took over market leadership from growth stocks around a month or two ago, defensive sectors got left out in the cold. Utilities have gotten bounced around, consumer staples have at least managed to keep up with the S&P 500, but real estate and healthcare have been the two major laggards.
If the general healthcare sector is out of favor with investors, the comparatively riskier biotech sector is probably doing even worse and that's exactly what we're seeing here. IBB is sitting about 12% off of its high today after failing to break through the $175 level twice this year.
Healthcare is very much a headline-driven sector and we just haven't seen this group get much attention. Sure, prescription drug prices have been mentioned here and there, but it's been almost all the Fed, interest rates, inflation and the debt in the news. COVID vaccines are still a thing, but they've become yesterday's news.
At a macro level, it's tough finding a catalyst here since investors are just more worried about other things. The move down that's occurred over the past 2-3 weeks was sharp, but it looks like it might be developing a base and could be poised to mean-revert shortly.
iShares MSCI EAFE Minimum Volatility Factor ETF (EFAV)
EFAV features not one, but two themes that have been relatively out of favor with investors. International stocks have seen mostly steady gains since the COVID recession bottom, but they have also consistently managed to keep up with the S&P 500. The minimum volatility factor, as has been the case with defensive sectors, has drawn a lot of interest since growth and cyclicals have been the two areas of the market that have traded market leadership.
Now that we're seeing particular strength in the dollar thanks to rising interest rates, international stocks have another catalyst that's keeping them further behind U.S. stocks. I think it's more likely than not at this point that yield spreads stay at their current levels or even expand further and that creates another headwind for foreign equities.
The decline in equities that we've seen recently are at least in part due to inflationary pressures and the uncertainty surrounding what global central banks are going to do on interest rates and bond purchases. Those factors aren't going away either. If inflation and supply chain issues remain persistent or central banks' hands are forced sooner than expected, investors may begin pivoting to defense rather quickly.
Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR)
Real estate was one of the best performing market sector since early last year, but that uptrend has been broken. The latest declines have coincided closely with the move higher in Treasury yields, so any further rate increases could exacerbate this trend.
REITs are in a position where you need to be picky because the risk/return profiles look so different at the sub-industry level. Data centers and infrastructure REITs, in my opinion, remain one of the best potential opportunities within the sector and the latest pullback creates a bargain buying opportunity.
The low yield on this ETF isn't necessarily what you might expect from a REIT portfolio, but this is a fast growing space and the real opportunity here comes from capital growth, not dividend income.