Beginning this week, we will be analyzing a different ETF once per week. We chose SMH for analysis this week because it is one of the most popular and liquid ETFs, with the exceptions of QQQ, SPY, and DIA. The purpose of this analysis is to enable you to understand the underlying components that comprise each ETF, as well as the bearing each respective stock has on the associated ETF. SMH is the ticker symbol for Semiconductor HOLDRS Trust and is one of seventeen different HOLDRS issued by Merrill Lynch. In addition, SMH is one of only six HOLDRS that trades an average daily volume of more than 300,000 shares. As explained in the August 19 issue, HOLDRS is an acronym that stands for HOLding Company Depositary ReceiptS (pronounced "holders"). These securities represent ownership in the common stock or American Depositary Receipts (ADRs) of specified companies in a particular industry, sector or group. A complete list of HOLDRS can be found by going to the HOLDRS web site. Since the Nasdaq is heavily comprised of semiconductor stocks, SMH is typically in play on most days when the Nasdaq is trending. Because individual semiconductor stocks can be very volatile and whippy, we have found that trading SMH is an excellent way to capitalize on significant moves in the SOX (Semiconductor) Index without being subjected to the wild price swings that individual stocks like MXIM and AMAT often have. SMH is one of our most actively traded ETFs and is the source of many profitable trade setups in The Wagner Daily. Since SMH is a composite of many different stocks, it trends better intraday, making technical analysis easier and more accurate. Here is detailed look at the composition of SMH. An explanation of how to interpret this data is listed below the chart: Company and Ticker: Pretty self-explanatory. This represents the name of the company and associated ticker symbol for each individual stock that comprises SMH. Shares: This is the quantity of shares of each individual stock that comprise one round-lot order of SMH. A round-lot order is equal to exactly 100 shares. For example, the total of 150 shares of stock that you see listed above equals the exact number of shares that you receive by buying 100 shares of SMH. So, if you buy 100 shares of SMH, you are buying 22 shares of Texas Instruments (TXN), as well as the specified number of shares in each of the other 19 stocks. By owning SMH, you also will receive dividends, when issued, from any associated stocks. Furthermore, HOLDRS can actually be converted to the underlying quantity of stocks by requesting your broker to do so. Price: Simply the last price of each stock that is listed, based on the closing prices of Friday, September 6. Market value: This is found by multiplying the number of shares of each stock times the last closing price. The sum of the porfolio's market value will always equal the current price of 100 shares of SMH. As of Friday's close, the sum of the market value was $2344.36. Taking that number and dividing by 100 shares equals the current price of one share of SMH. Here is how we derive the price of SMH: $2344 (market value) / 100 (one round lot of shares) = $23.44 per share of SMH. Notice that the closing price of SMH on Friday was $23.39, within 5 cents of the actual value of the components. Percent Weight: Represents the current percentage of the entire portfolio that is represented by that one stock. This percentage will constantly be changing as the market value of each individual stock changes. However, the number of shares of each stock does not change. For example, if Intel had a really strong up day but the rest of the Semis did not rally much, it would result in an increase in the percentage weighting of Intel within the portfolio. One strategy we have found to be effective is to set up a group of quotes with your data provider that lists each stock within SMH. As you are trading SMH intraday, you will find that watching the performance of the individual stocks enables you to get a better idea of the relative strength or weakness of SMH, especially when the price of one of the stocks in SMH is being heavily affected by news. Below is a screenshot of a market minder that we have set up to follow SMH. Notice how we have the stocks sorted by percentage change so that we can quickly see who the best and worst performers are within SMH. We can then compare their performance with their percentage weighting to predict short-term price movement of SMH in relation to the SOX index: We recommend you print out this page and study the components within SMH. Once you begin to memorize the individual components and weightings of each stock, you will find significant improvements in your profitability. We will analyze a different ETF next week, so use the coming week to master SMH. After all, there will be a pop quiz and you may need to know how many shares of AMD comprise one round lot of SMH. Anyone know the answer?
Glad you like the information. I will keep posting here, probably about once per week. Have a nice weekend,
There is a piece in this week-end's Barrons claiming that a lot of hedge funds now use ETFs as their favorite vehicle to sector rotate rapidly. The point was also made that ETF volume has been climbing rapidly over the last several months. With the exception of a handful of ETFs (qqq, spy, dia, smh and bbh ..and maybe a couple of others) they are still too illiquid for me. I'm suprised that xlf (financials) and most other sectors are still so lightly traded. Any thoughts?
deron I have only read the first and last pages and I am glad you took the heat, stayed around and posted that info, it is useful and I know a guy in my office who spent a great deal of time assembling the information you just gave out. So maybe you found it quickly but he did not.
Deron, This is useful info (and accurate, I'm an ETF trader somewhat and can tell you have your facts straight) Other people who have hit you with sarcasm should be less eager to judge and quicker to offer something with equal substance. Also for a guy with SOME business agenda you have been remarkably low-key (practicing attraction, not promotion) and for that I applaud you. Nasdaq websight has a useful tool called ETF Heatmap (money.net users will recognize) which will give a nice picture at a glance of how each sector is performing. Time delay is only a couple minutes, not 20 min. It will update automatically if you leave it up in a seperate browser window.
The Wagner Daily September 16, 2002 -------------------------------------------------------------------------------- Commentary: Last week was filled with an abundance of indecision combined with a lack of commitment, as evidenced by all the gaps and narrow range days we experienced. The anticipatory rally going into September 11 turned out to be nothing but smoke and mirrors, which often happens when there is no precedence of history for a particular trading day -- nobody really knew what to expect the market to do on the 11th. After getting smacked pretty hard on Wednesday and Thursday, the markets rallied and attempted to form a reversal day on Friday. If you remove all the volatility, last week's major indices basically closed the week where the started. The Nasdaq started out with more relative strength than the S&P on Friday, with Software, Semis, and Hardware stocks all leading the way immediately after the market opened. However, going into the afternoon session, the balance of power shifted as the Nasdaq weakened and the S&P gained momentum. Both major indices were choppy on Friday, but closed near their intraday highs. A close at the previous day's high usually leads to follow-through the next morning, but we don't feel very confident it will happen because there is so much resistance at current price levels on the daily charts. None of the daily charts we researched this weekend are looking very tradeable. More importantly, the S&P is still setting up a bearish head and shoulders on the daily chart. Since the predicted move of a head and shoulders pattern is equivalent to the distance from the top of the head to the neckline, the S&P would probably test its 52-week low if it breaks the neckline. Take a look: We should gradually see volume begin to return to the markets this week with the passing of September 11 and people returning back from their summer vacations. Beware, however, that the issue over how to deal with Iraq is still a black cloud over the markets. In our opinion, we don't think anything will happen in Iraq in the near future, but even if that is the case, bear in mind the markets will be very susceptible to rumors and news bytes from the media. Just be alert and conservative with your overnight position sizes until we get a little more clarity on that issue. Other than that, trading should begin to take on a "business as usual" approach as Summer draws to a close. ----------------------------------------------------- OIH - Oil Service Index HOLDRS ETF Sector: Oil Service Long Trigger = 52.20 Target = 54.19 Stop = 51.27 Notes = Although our trade setups are always based on technical analysis, occasionally there is an opportunity to use fundamental analysis to confirm our technical setup. In the case of OIH, we feel that the current fear over a war with Iraq could lead to rising oil prices, which would push the oil drillers higher. By setting our trigger price above resistance on the 60-minute chart (above), we are forcing our fundamental trade idea to confirm itself through technical analysis. If OIH gets above the gap down from September 3, it will be above its 20-period moving average on the 60-minute chart and will also be above the upper channel of its downtrend from September 11. Our stop is the 200 MA on the 60-minute chart. Our first target is the high of September 11, but we may raise our target if OIH breaks through that level convincingly. ----------------------------------------------------- PPH - Pharmaceutical Index SPDR ETF Sector: Pharmaceutical Short Trigger = 71.80 HALF position only; will add another HALF below 71.20 Target = 68.85 Stop = 72.80 Notes = Even though we got stopped out of PPH on Friday, we still like this short setup on the daily chart if it gets below last Thursday's low. We will short a HALF position below last Thursday's low and short another HALF below Friday's low. Occasionally we enter a trade a day or two early, but when our re-entry prices trigger, it usually results in a much more profitable trade because more people are trapped on the wrong side. Notice how there is not much price or moving average support below Friday's low. Our target is the high of the gap from July 29. Our stop is Friday's high. Be aware that PPH is one of the more volatile ETFs we trade, so adjust your position size accordingly. Even one or two hundred shares can be profitable on a several point move. --------------------------------------------- Friday's report card: Our trailing stop on RTH enabled us to lock in profits on the second half of our overnight position before the sector reversed on positive consumer spending numbers. PPH triggered by only a few pennies and quickly reversed, stopping us out. XLF short did not trigger. Closed Positions: RTH short - shorted 81.90 (average), trailing stop hit on second HALF of position at 81.00, closed with + 0.90 PPH short - shorted 71.39, stopped out 72.45, closed with (1.06) XLF short - (never triggered) Open Positions: (none) -------------------------------------------------------------------------------- Glossary and Notes: Remember that opening gaps that cause stocks to trigger immediately on the open carry a higher degree of risk because the gaps (both up and down) often do not hold. Use caution if trading stocks with large opening gaps. Trigger = Exact price that stock must trade through before I will enter the trade. If a long position, we will only enter the stock if it trades at the trigger price or higher. For a short position, we will only enter the stock if it trades at the trigger price or lower. It is really important to only enter the position if the trigger price is hit, otherwise the trade becomes riskier. Target = The anticipated price we are expecting the stock to go to. However, this does not mean that we will always hold the stock to that price. If conditions warrant, we will sometimes take profits before that price, in which case we will notify you of the change. Stop = The price at which we will have a physical stop market order set. As a position becomes profitable, this stop price will often be adjusted to lock in profits. Again, you will always be notified of such changes in the next daily report or intraday if you subscribe to intraday updates. SOH = Sit On Hands (Don't Make Trades) Closed P&L under Deron's Report Card is based on the actual price we closed the trade at, not just the theoretical target or stop price listed for each stock. Open P&L is based on the closing prices of the most recent trading day. Unless otherwise noted, average holding time is 2 days to 2 weeks once a position is triggered. Updates on open positions are provided daily.
We bought OIH (the oil service HOLDRS) when it triggered per my previous post. There is a lot of relative strength in that index right now (it's at the high of the day as the S&P is near the low). Looking to use a trailing stop. We also shorted a HALF position of PPH, per the explanation given. Looks like it could be a choppy day, so we are avoiding the broad-based ETFs such as QQQ, DIA, and SPY and instead are focusing on sector HOLDRS that are showing divergence.