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Rally is Looking Tired and Overbought

Is leveraged ETF buying a good contrarian indicator? I've noted that major indices have been advancing to new highs, but on lackluster buying interest and flat breadth. In other words: the rally is looking tired and overbought.

There has been a group of traders who have actively tried selling into these rallies and so far they have been spectacularly wrong, lending credence to the theory that leveraged and inverse ETF buying and selling is a good contrarian indicator. This group — mostly day-trader types — have been using 3x leveraged ETFs to place their bets. Why those? That's where you get the most juice.

Charles Biderman at TrimTabs.com provides the details: in the past two weeks, this group has been selling the 3x leveraged long ETFs and buying 3x leveraged short ETFs. There's $4.5 billion in assets in the 3x long ETFs. There have been outflows of $342 million or 7.6 percent of assets in the last two weeks. In that period, they are UP 3.6 percent.

The inverse short 3x ETFs have $2.9 billion in assets, and have seen inflows of $273 billion in the past two weeks, or 9.0 percent of assets. They are DOWN 4.2 percent.

In other words, the bet has been wrong. Biderman watches this type of activity and argues that it is one of the most potent contrarian trading indicators.

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