Below is a look at our trading range screen for the 30 largest country ETFs traded on U.S. exchanges. For each country ETF, the dot represents where it is currently trading within its range. The tail end represents where it was trading exactly one week ago, and the black vertical “N” line represents each ETF’s 50-day moving average. When the ETF moves into the light red shading, it means it’s more than one standard deviation above its 50-day moving average — a level we call “overbought”. The dark red shading represents more extreme overbought levels — greater than two standard deviations above the 50-day moving average. (The vice versa is true for the green shading, which we call “oversold”.)
Last week at this time, equities across the globe had pushed well into extreme overbought territory. Generally, when extreme overbought levels are reached, it’s a sign that a rally is probably going to run out of steam in the very near term. Typically you see either a pause in the action or a “mean-reversion” pullback. That’s exactly what we saw last week. We didn’t see any kind of significant drop in equity markets, but we saw buying action run out of steam. Even after last week’s pullback, though, you can see that a large number of markets remain overbought. They’re just not as overbought as they were a week ago. In the coming days, if we continue to see classic “mean reversion” action, these country ETFs will see support at their 50-day moving averages get tested. If the 50-days can hold, it could offer up decent entry points on the long side.