Quick side question if you don't mind: what do you think of the new BLDRS ETFs. They had virtually no volume on their opening day yesterday and I'm wondering if that's typical for a new ETF starting out or if there is something less than desirable with these new issues? Or is it just the fact they're ADRs and there's less interest in baskets of ADRs?
Why actively trade ETFs?
- Thread starter deronwagner
- Start date
Well, they have not been very heavily promoted, so the volume will probably grow as awareness increases. This was also the case when the HOLDRS first were released.
However, I also think that traders would be more into having an ETF of ADRs that was grouped by country instead of all of them being lumped together.
Time will tell whether the interest grows or not, but it certainly is nice to see the popularity of ETFs growing because it keeps spawning new ones.
We'll let you know if we start trading the BLDRS.
However, I also think that traders would be more into having an ETF of ADRs that was grouped by country instead of all of them being lumped together.
Time will tell whether the interest grows or not, but it certainly is nice to see the popularity of ETFs growing because it keeps spawning new ones.
We'll let you know if we start trading the BLDRS.
Do you shy away from CEFs? If so, is that because of the discount/premium issue?
Also: you can't short CEF's on a downtick, right?
Also: you can't short CEF's on a downtick, right?
Maglia Rosa,
I appreciate your input about dividends and the effect they will have on the fair value of each ETF. However, unless I am missing something here, I don't think that would have any direct affect on the value of the ETF because the price of the underlying stock is adjusted on the ex-dividend date to match the amount of the dividend. Therefore, I don't think that accrued dividends make a difference. For example, if DUK is trading at 59.40 on December 3 and pays a 40 cent dividend on December 4, the price of DUK will be lowered to 59.00 by the specialist to reflect the new ex-dividend price. The net result to the ETF should be the same whether the dividends were distributed or not because the total value of the stock price remains the same. Do you agree?
Thanks for your input,
Deron
I appreciate your input about dividends and the effect they will have on the fair value of each ETF. However, unless I am missing something here, I don't think that would have any direct affect on the value of the ETF because the price of the underlying stock is adjusted on the ex-dividend date to match the amount of the dividend. Therefore, I don't think that accrued dividends make a difference. For example, if DUK is trading at 59.40 on December 3 and pays a 40 cent dividend on December 4, the price of DUK will be lowered to 59.00 by the specialist to reflect the new ex-dividend price. The net result to the ETF should be the same whether the dividends were distributed or not because the total value of the stock price remains the same. Do you agree?
Thanks for your input,
Deron
Deron, I have to commmend you on this thread.
ETF's have lost favor with the exclusion from ISLD active level 2 displays, and the exclusion from the ASE (American Stock Exch) specialists, forcing the competition to no longer display. Essentially, it doesn't remove that ECN as a vialble alternative, it just makes everyone fly blind when trading them, not seeing the competition and multiple pricing levels (bids/asks-offers).
Your extensive commentary with graphics have been quite enlightening, and beneficial to all who have waved through all these statements, facts and conclusions. Excellent job!
A partner of mines, tries to trade the SPY's with little or no straight forward success. When the Level 2's had the direct participation of the ISLD ECN participants, pricing movements went very smooth. PResently in this environment, the pricing pattern is more than choppy, and one has to chance missing the move and pricing one's purchase/sales away from the current bids. Specialist rigged rallies of .20 or more are common and never in one's favor, nor have sufficient depth to react and get filled on closing positions. Hence the same nasty trading tricks that existed on the AMEX for the QQQ's (and all the hate mail posted on dozens of threads here against those wonderful guys) have transfered to almost all the ETF's.
Whilest I'm not questioning your representation or focus in promoting a specific manner of interpreting the value of trading the ETF's I will ask you to make the same disclaimer that CNBC / CNNfn asks of all its commentators, and it goes like this: "do you maintain a position in these securities for profit, represent their interests or represent the creator of these products or the exchange backing them?".
No offense suggested, but I'd prefer knowing that your comments are unbiased, and not receiving paid advertisement or consulting fees to promote these products. I'm saying this because I'm not inclined to be a buy and hold investor instead of continuing to be a trader, whether in very short terms, short term or just for half day positions. I have seen too much money drizzled away from intentionally maneauvered slippage since these have returned to specialist traded vehicles.
ETF's have lost favor with the exclusion from ISLD active level 2 displays, and the exclusion from the ASE (American Stock Exch) specialists, forcing the competition to no longer display. Essentially, it doesn't remove that ECN as a vialble alternative, it just makes everyone fly blind when trading them, not seeing the competition and multiple pricing levels (bids/asks-offers).
Your extensive commentary with graphics have been quite enlightening, and beneficial to all who have waved through all these statements, facts and conclusions. Excellent job!
A partner of mines, tries to trade the SPY's with little or no straight forward success. When the Level 2's had the direct participation of the ISLD ECN participants, pricing movements went very smooth. PResently in this environment, the pricing pattern is more than choppy, and one has to chance missing the move and pricing one's purchase/sales away from the current bids. Specialist rigged rallies of .20 or more are common and never in one's favor, nor have sufficient depth to react and get filled on closing positions. Hence the same nasty trading tricks that existed on the AMEX for the QQQ's (and all the hate mail posted on dozens of threads here against those wonderful guys) have transfered to almost all the ETF's.
Whilest I'm not questioning your representation or focus in promoting a specific manner of interpreting the value of trading the ETF's I will ask you to make the same disclaimer that CNBC / CNNfn asks of all its commentators, and it goes like this: "do you maintain a position in these securities for profit, represent their interests or represent the creator of these products or the exchange backing them?".
No offense suggested, but I'd prefer knowing that your comments are unbiased, and not receiving paid advertisement or consulting fees to promote these products. I'm saying this because I'm not inclined to be a buy and hold investor instead of continuing to be a trader, whether in very short terms, short term or just for half day positions. I have seen too much money drizzled away from intentionally maneauvered slippage since these have returned to specialist traded vehicles.
Hi limitdown,
Glad you are finding this thread to be of benefit to you. I certainly can understand your concerns, so let me address them in a succinct manner. . .
I certainly do take positions in the ETFs I discuss, such as QQQ, SPY, DIA, SMH, BBH, OIH, etc. In fact, we maintain and publish detailed records of the trades we take each and every day. I am the owner of a company that publishes a daily newsletter with our technical analysis of various ETFs, which mentions each and every trade we enter. So, I guess you could say this thread promotes my service in the hopes of attracting new subscribers, but I also make a valiant effort to provide quality, educational material.
I am not in any way associated with any organization or entity that pays me in any way to promote the ETFs I discuss. They are simply the same trades that I enter, based on technical analysis, which we feel offer profitable opportunities to our subscribers.
We are consistently profitable trading the ETFs, but we are probably in each position a bit longer than most readers of ET. The average length of time we hold any ETF is about 5 hours. So, we are not scalpers and generally only enter positions like SPY or DIA if we are planning on making 75 cents - 2 points in it.
Deron
Glad you are finding this thread to be of benefit to you. I certainly can understand your concerns, so let me address them in a succinct manner. . .
I certainly do take positions in the ETFs I discuss, such as QQQ, SPY, DIA, SMH, BBH, OIH, etc. In fact, we maintain and publish detailed records of the trades we take each and every day. I am the owner of a company that publishes a daily newsletter with our technical analysis of various ETFs, which mentions each and every trade we enter. So, I guess you could say this thread promotes my service in the hopes of attracting new subscribers, but I also make a valiant effort to provide quality, educational material.
I am not in any way associated with any organization or entity that pays me in any way to promote the ETFs I discuss. They are simply the same trades that I enter, based on technical analysis, which we feel offer profitable opportunities to our subscribers.
We are consistently profitable trading the ETFs, but we are probably in each position a bit longer than most readers of ET. The average length of time we hold any ETF is about 5 hours. So, we are not scalpers and generally only enter positions like SPY or DIA if we are planning on making 75 cents - 2 points in it.
Deron
Are you referring to Closed End Funds? Not sure if that is what you mean by CEFs. If so, we don't trade those because it's harder to place a concrete value on them and other liquidity issues.
Deron
Deron
We chose RTH (Retail Index HOLDRS Trust) for analysis this week since two of the largest percentage components of the index (WMT and HD) both are reporting or have reported earnings. The purpose of our weekly 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. We are currently analyzing the HOLDRS series of ETFs, but will soon be looking at other types of ETFs such as SPDRS, iShares, and the new "Fighters" fixed-income securities.
RTH is the ticker symbol for the Retail Index HOLDRS Trust and is one of seventeen different HOLDRS issued by Merrill Lynch. The average daily volume of RTH is 580k shares, though it has been steadily increasing during the past several months as ETF awareness grows. Just like all the other HOLDRS, RTH must closely follow the price of each underlying component, otherwise arbitrage opportunities exist.
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.
RTH is comprised of individual stocks within the Retail sector such as Wal-Mart, Home Depot, Radio Shack, The Gap, Sears, etc. If you want to invest in companies that are in the Retail index, buying RTH represents a much lower risk trade than buying individual stocks within the sector. The RTH index is comprised of 20 different stocks within the Retail sector. The broad-based index we watch to follow the sector is the S&P Retail Index ($RLX.X).
Here is detailed look at the composition of RTH. A complete 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 RTH.
Shares: This is the quantity of shares of each individual stock that comprise one round-lot order of RTH. A round-lot order is always equal to exactly 100 shares, which is the minimum quantity of shares of any HOLDRS that can be purchased. For example, the total of 244 shares of stock that you see listed above equals the exact number of shares that you receive by buying 100 shares of RTH. By purchasing 100 shares of RTH, you are buying 36 shares of Wal-Mart (WMT), 14 shares of Lowes (LOW), 6 shares of Best Buy (BBY), and the specified number of shares in each of the other 17 stocks that comprise RTH. By owning RTH, you also will receive dividends, when issued, from any associated stocks. However, because the prices of each dividend-paying stock is adjusted after paying dividends, the net result on the value of the ETF is minimal. 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, based on the closing prices of Monday, November 18.
Market value: This is found by multiplying the number of shares of each stock times the last closing price. The sum of the portfolio's market value will always equal the current price of 100 shares of RTH. As of today's close, the sum of the market value was $7,455.95. Taking that number and dividing by 100 shares equals the current price of one share of RTH. Here is how we derive the price of RTH: $7,455.95 (market value) / 100 (one round lot of shares) = $74.56 per share of RTH. Notice that the closing price of RTH today (November 18) was $74.50, which represents a 6 cent discount to the actual value of the components. Sometimes there are arbitrage opportunities in instances when the value of the ETF strays too far away from the value of the underlying securities.
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, because Best Buy (BBY) had a really strong up today, but the rest of the Retail stocks did not rally much, it resulted in an increase in the percentage weighting of Best Buy 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 RTH. As you are trading RTH, 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 RTH, especially when the price of one of the stocks in RTH is being heavily affected by news.
By calculating the exact price of the underlying components of the ETF, it enables you to know a fair price to bid for buying RTH if the spread is large. Based on the most recent closing price, any price below $74.56 would represent a discount to the current price on RTH, while any price above that level would indicate a premium to the underlying components. Stay tuned for the pending release of our spreadsheet that will automatically calculate real-time "fair market values" of each of the HOLDRS we trade.
Below is a screenshot of a market minder that we have set up to follow RTH. Notice how we have the stocks sorted by percentage change so that we can quickly see who the best and worst performers are within RTH. We can then compare their performance with their percentage weighting to predict short-term price movement of RTH in relation to the S&P Retail Index ($RLX.X). Notice how BBY rallied over 7% today, but had little effect on the price of RTH, which closed down over 1.6% on the day, because it is weighted less than 2% in the index:
It is helpful to have printed copies of the underlying components and a market minder following each sector because it enables you to analyze the importance of price divergence of particular stocks throughout the day. Once you begin to memorize the individual components and weightings of each stock, you will find significant improvements in your profitability. Look for analysis of a different ETF next week.
RTH is the ticker symbol for the Retail Index HOLDRS Trust and is one of seventeen different HOLDRS issued by Merrill Lynch. The average daily volume of RTH is 580k shares, though it has been steadily increasing during the past several months as ETF awareness grows. Just like all the other HOLDRS, RTH must closely follow the price of each underlying component, otherwise arbitrage opportunities exist.
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.
RTH is comprised of individual stocks within the Retail sector such as Wal-Mart, Home Depot, Radio Shack, The Gap, Sears, etc. If you want to invest in companies that are in the Retail index, buying RTH represents a much lower risk trade than buying individual stocks within the sector. The RTH index is comprised of 20 different stocks within the Retail sector. The broad-based index we watch to follow the sector is the S&P Retail Index ($RLX.X).
Here is detailed look at the composition of RTH. A complete 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 RTH.
Shares: This is the quantity of shares of each individual stock that comprise one round-lot order of RTH. A round-lot order is always equal to exactly 100 shares, which is the minimum quantity of shares of any HOLDRS that can be purchased. For example, the total of 244 shares of stock that you see listed above equals the exact number of shares that you receive by buying 100 shares of RTH. By purchasing 100 shares of RTH, you are buying 36 shares of Wal-Mart (WMT), 14 shares of Lowes (LOW), 6 shares of Best Buy (BBY), and the specified number of shares in each of the other 17 stocks that comprise RTH. By owning RTH, you also will receive dividends, when issued, from any associated stocks. However, because the prices of each dividend-paying stock is adjusted after paying dividends, the net result on the value of the ETF is minimal. 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, based on the closing prices of Monday, November 18.
Market value: This is found by multiplying the number of shares of each stock times the last closing price. The sum of the portfolio's market value will always equal the current price of 100 shares of RTH. As of today's close, the sum of the market value was $7,455.95. Taking that number and dividing by 100 shares equals the current price of one share of RTH. Here is how we derive the price of RTH: $7,455.95 (market value) / 100 (one round lot of shares) = $74.56 per share of RTH. Notice that the closing price of RTH today (November 18) was $74.50, which represents a 6 cent discount to the actual value of the components. Sometimes there are arbitrage opportunities in instances when the value of the ETF strays too far away from the value of the underlying securities.
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, because Best Buy (BBY) had a really strong up today, but the rest of the Retail stocks did not rally much, it resulted in an increase in the percentage weighting of Best Buy 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 RTH. As you are trading RTH, 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 RTH, especially when the price of one of the stocks in RTH is being heavily affected by news.
By calculating the exact price of the underlying components of the ETF, it enables you to know a fair price to bid for buying RTH if the spread is large. Based on the most recent closing price, any price below $74.56 would represent a discount to the current price on RTH, while any price above that level would indicate a premium to the underlying components. Stay tuned for the pending release of our spreadsheet that will automatically calculate real-time "fair market values" of each of the HOLDRS we trade.
Below is a screenshot of a market minder that we have set up to follow RTH. Notice how we have the stocks sorted by percentage change so that we can quickly see who the best and worst performers are within RTH. We can then compare their performance with their percentage weighting to predict short-term price movement of RTH in relation to the S&P Retail Index ($RLX.X). Notice how BBY rallied over 7% today, but had little effect on the price of RTH, which closed down over 1.6% on the day, because it is weighted less than 2% in the index:
It is helpful to have printed copies of the underlying components and a market minder following each sector because it enables you to analyze the importance of price divergence of particular stocks throughout the day. Once you begin to memorize the individual components and weightings of each stock, you will find significant improvements in your profitability. Look for analysis of a different ETF next week.
Though not heavily publicized or promoted, the Nasdaq launched a new family of ETFs last week collectively called the BLDRS (Baskets of Listed Depositary Receipts). Each of the four ETFs in the BLDRS family consist of a basket of individual ADRs (American Depository Receipts). The four new ETFs are: ADRA (Asia 50 ADR Index Fund), ADRD (Developed Markets 100 ADR Index Fund), ADRE (Emerging Markets 50 ADR Index Fund), and ADRU (Europe 100 ADR Index Fund). The funds each track well-known ADR indexes compiled and maintained by the Bank of New York, another player in ETFs.
This is the first launch of ETFs on the Nasdaq because all the other ETFs are listed on the AMEX. If the Nasdaq continues to introduce new ETFs, this will surely improve trading conditions for us due to the competition for the AMEX to give the best pricing. Daily trading volume has been nearly non-existent in the BLDRS so far, but it will probably pick up as exposure and awareness increases. To learn more about the BLDRS family of ETFs, go to http://www.bldrsfunds.com.
This is the first launch of ETFs on the Nasdaq because all the other ETFs are listed on the AMEX. If the Nasdaq continues to introduce new ETFs, this will surely improve trading conditions for us due to the competition for the AMEX to give the best pricing. Daily trading volume has been nearly non-existent in the BLDRS so far, but it will probably pick up as exposure and awareness increases. To learn more about the BLDRS family of ETFs, go to http://www.bldrsfunds.com.
Just our opinion. . .
After the Nasdaq gapped a few points above its highs of the month and the highest level seen since June, the gap quickly faded, led by weakness in the S&P and Dow, both of which were unable to rally beyond their overhead resistance from the beginning of November. It was a tricky day to be either long OR short yesterday because the market gapped up above Friday's highs, sold off steadily in the morning, reversed the selloff around noon, rallied back to the upper third of the intraday range (especially on the Nasdaq), and ultimately sold off again at 2:00 pm, setting new lows of the day. There was money to be made on both of sides of the market yesterday, but the bears ultimately won by the end of the day. In fact, the Nasdaq was much weaker than the S&P by the end of the day, with the Semis totally reversing off of earlier gains. Undoubtedly, there are also a lot of bulls who bought and are now trapped near the highs of yesterday. Fortunately, our opening gap rules kept us out of trouble once again and prevented us from buying QQQ and DIA at the highs of the day, although we did take a loss on our OIH long yesterday morning. We made back most of our OIH losses by catching DIA and SPY short on two separate occasions yesterday, especially on the selloff into the close.
Yesterday's selloff and subsequent closing prices near the intraday lows after a gap above Friday's highs was very bearish and resulted in some interesting technical factors taking place in each of the three major indices we follow (QQQ, SPY, and DIA). Let's take a look at each of these three indices:
Most interestingly is that the Nasdaq (and the SOX index) formed a quadruple top on the daily charts by failing to break its former highs from November 6 and resistance from July 17 and August 22. This is best illustrated by looking at a daily chart of the Nasdaq Composite (COMPX) below:
Notice how the COMPX has failed to break the 1426 level on FOUR separate occasions since July. This has been a key resistance point that we need to continue watching. A break above that level would make it nearly a no-brainer to buy, but the market internals are not confirming the move and neither is the S&P or Dow.
The S&P futures (and SPY) failed to break above the high of November 6, which we have been talking about as an important resistance level that represented the head of a head and shoulders pattern on the daily chart. As we have been discussing, a failure to break that price level means the h&s pattern is still in effect. Confirmation of the h&s pattern following through would be another selloff back down to, and a subsequent break below, the neckline (around 87.50 on SPY). So, while the S&P still has a ways to go before testing the neckline again, keep an eye on that key level, illustrated below:
The Dow Jones Industrial Average (and DIA) has a similar head and shoulders pattern to the S&P, however the Dow is looking technically worse than the S&P because of its proximity to the 20-day moving average. Notice how the Dow closed within a few points of its 20-day moving average. This is an important level that is closely followed by market technicians. Since October 14, there have only been three days where the Dow traded below its 20-day moving average and that level acted as support on all the other occasions. However, if the Dow gets back below the 20-day MA, it would mean that the November 14 breakout back above that level has failed. We expect strong selling to hit the Dow if it drops below its 20-day moving average again, so watch that level on DIA, which is currently at exactly 85.00. Take a look:
Good trading to you,
Deron
After the Nasdaq gapped a few points above its highs of the month and the highest level seen since June, the gap quickly faded, led by weakness in the S&P and Dow, both of which were unable to rally beyond their overhead resistance from the beginning of November. It was a tricky day to be either long OR short yesterday because the market gapped up above Friday's highs, sold off steadily in the morning, reversed the selloff around noon, rallied back to the upper third of the intraday range (especially on the Nasdaq), and ultimately sold off again at 2:00 pm, setting new lows of the day. There was money to be made on both of sides of the market yesterday, but the bears ultimately won by the end of the day. In fact, the Nasdaq was much weaker than the S&P by the end of the day, with the Semis totally reversing off of earlier gains. Undoubtedly, there are also a lot of bulls who bought and are now trapped near the highs of yesterday. Fortunately, our opening gap rules kept us out of trouble once again and prevented us from buying QQQ and DIA at the highs of the day, although we did take a loss on our OIH long yesterday morning. We made back most of our OIH losses by catching DIA and SPY short on two separate occasions yesterday, especially on the selloff into the close.
Yesterday's selloff and subsequent closing prices near the intraday lows after a gap above Friday's highs was very bearish and resulted in some interesting technical factors taking place in each of the three major indices we follow (QQQ, SPY, and DIA). Let's take a look at each of these three indices:
Most interestingly is that the Nasdaq (and the SOX index) formed a quadruple top on the daily charts by failing to break its former highs from November 6 and resistance from July 17 and August 22. This is best illustrated by looking at a daily chart of the Nasdaq Composite (COMPX) below:
Notice how the COMPX has failed to break the 1426 level on FOUR separate occasions since July. This has been a key resistance point that we need to continue watching. A break above that level would make it nearly a no-brainer to buy, but the market internals are not confirming the move and neither is the S&P or Dow.
The S&P futures (and SPY) failed to break above the high of November 6, which we have been talking about as an important resistance level that represented the head of a head and shoulders pattern on the daily chart. As we have been discussing, a failure to break that price level means the h&s pattern is still in effect. Confirmation of the h&s pattern following through would be another selloff back down to, and a subsequent break below, the neckline (around 87.50 on SPY). So, while the S&P still has a ways to go before testing the neckline again, keep an eye on that key level, illustrated below:
The Dow Jones Industrial Average (and DIA) has a similar head and shoulders pattern to the S&P, however the Dow is looking technically worse than the S&P because of its proximity to the 20-day moving average. Notice how the Dow closed within a few points of its 20-day moving average. This is an important level that is closely followed by market technicians. Since October 14, there have only been three days where the Dow traded below its 20-day moving average and that level acted as support on all the other occasions. However, if the Dow gets back below the 20-day MA, it would mean that the November 14 breakout back above that level has failed. We expect strong selling to hit the Dow if it drops below its 20-day moving average again, so watch that level on DIA, which is currently at exactly 85.00. Take a look:
Good trading to you,
Deron