ETF sentiment reads for Tuesday February 15, 2011

Overall our data is currently pointing to the upside trend continuing in the near term in the U.S. stock market - upwards price momentum is combined with solidly positive, but not excessively optimistic, sentiment.  That said, there are a number of interesting psychological trends we're seeing that present potentially good ETF trade ideas for the next one to two weeks.

The essence of our data is to measure crowd opinion and strong concentrations of sentiment.  When sentiment is extremely biased in one direction, we look for signs of reversal, and usually our clients will bet on an unraveling - that's their essential strategy.  Due to the characteristics of crowd behavior, most of the trade ideas below will naturally be contrarian. 

SHORTS
The ETF PBS (Leisure and Entertainment) is overextended to the upside.  Our data demonstrates high investor optimism which is coupled with recent price outperformance.  PBS may pause its recent run for a week or two and underperform the market.

KOL (Coal ETF) is likely to lag the market as well.  We're seeing very high levels of optimism coming off a strong bull move, which is a blow-off top scenario.  Due to the high optimism, it's likely to continue to underperform until investors adjust their expectations downwards.

Oil is likely to underperform over the next few weeks due to the investment community's concerns about Egyptian instability and associated fears and pessimism about oil supplies.  As the nervousness about Middle Eastern insecurity gradually resolves, the price of oil is likely to settle lower.  As a result, some Oil-related ETFs like IEZ are likely to underperform the market going forward.

LONGS
Biotech (IBB)  tops our "Most Hated" sector list for Monday.  Combined with its recent underperformance, it is set up psychologically for an upside move.  Over the past month we've seen a dramatic increase in our investor dissatisfaction scores in the Biotech sector.   Health care (XLV) is in a similar position.

Another one to two week long idea we have is in the homebuilders (XHB).  As you might imagine, we're seeing the highest negativity in this sector, and XHB tops our pessimism ranking.  While it may seem self-evident that investors are pessimistic about housing, we have observed that extreme levels of pessimism as we're seeing in the housing sector often precede a reversal.