Why actively trade ETFs?
- Thread starter deronwagner
- Start date
For the first time in nearly a month, we are beginning to feel good about getting a little aggressive in the markets. As such, we wanted to share our analysis of what has caused our change in sentiment. We'll begin by looking at recent market action during the past few weeks and will conclude with our opinion of what to expect going forward.
In the Sep 23 issue we discussed a chart pattern known as the Head and Shoulders (H&S) and showed a chart of SPY (the S&P 500 index tracking stock), which had just broken the neckline of the H&S. Upon discussing the predicted drops of a H&S pattern upon breaking the neckline, we explained that the predicted drop is equal to the distance from the top of the head to the neckline. In the case of SPY, that equated to a drop down to the $80 area. To refresh your mind, here is the same chart that we discussed last week:
Since the top of the head in this pattern was approximately $96 and the neckline was around $88.00, the predicted drop of SPY was approximately 8 points below the neckline ($96 - $88). This equaled a predicted drop to around $80. Well, take a look at the low of SPY exactly one week later:
Notice how the low of SPY was exactly $80! Therefore, the H&S followed-through completely. Pretty cool, isn't it? Even more interesting is the fact that the completion of the H&S pattern on September 30 probably marked the short-term low in the S&P. In fact, today's market action was very bullish and sets up the market for some significant follow-through to the upside.
As you would probably agree, the market has been very challenging to trade during the past few weeks. Even though the market has been in a downtrend, it has been difficult to profit on both the long AND short side of the market because most of the selling has occurred with gaps or fades on the gaps, as opposed to steady intraday downtrends. The end result was a lot of choppiness without follow-through in either direction. Despite these conditions, there were two interesting things we began to notice that indicated to us that a short-term bottom was probably near.
The first indicator was volume, which usually precedes price. Through paying attention to volume, we noticed that the heavier volume days were occurring on up days, while most of the lighter volume days were sideways to down. Second, we noticed that even though the market kept gapping down or selling off in the morning, there was not much selling momentum to push prices lower throughout the day. Both of these signals indicated to us that the sellers were starting to dry up, thereby enabling the market to rally on the slightest bit of buying interest. In other words, the bears were getting worn out. While this may not be a tangible technical indicator, it is definitely an observation that you do not want to ignore because those two signals typically precede a big rally. While many traders were viewing the weakness of the past week as short-term breaks of support, a look further back to the end of July indicated that rather than breaking support, the market was actually basing on support that was already established. The markets have been creating a new support base through the double bottom that was put in during the past few days in all the major market indices. This resulted in many shorts getting trapped at the lows when the markets rallied above the highs of September 30.
Given the signals discussed above, we were not surprised to see the big rally that occurred today (October 1) in SPY and DIA, both of which really gained momentum after breaking the highs of September 30. Today's rally in SPY and DIA was even more important than the one we saw on September 25 and 26 because today's closing prices put them both above the upper channel resistance of the downtrends on their respective daily charts, whereas last week's rally fizzled out when prices rallied into that same trendline resistance. The Nasdaq also had a strong rally today, but has been lagging the S&P during the past several days. As such, QQQ has not yet broken the upper channel resistance of the trendline, but is very close to doing so. Going into the coming week, any rally above today's highs will break the downtrend. Below are daily charts of four of the major ETFs we trade on a regular basis: SPY, DIA, QQQ, and SMH (all of which were profitable intraday and swing trades today for our subscribers):
Although the daily charts are looking great for most of the major market indices, it is not yet safe to say the bear market has ended because resistance has not yet been broken on the longer term weekly charts. Remember that the longer the time horizon, the more significant the chart pattern becomes. Therefore, let's keep a close eye on the weekly charts, especially QQQ which is close to breaking the weekly resistance. When these resistance levels start getting broken on the weekly charts of the major indices, we could really start to see some major buying. Until then, we will continue to be cautiously long unless SPY or DIA breaks back down below the resistance levels that were just broken. These trendlines are good buy stops to go long (such as with QQQ and SMH) and are also a logical place for stop losses once the index breaks the trendline. Keep in mind that when an index or stock breaks resistance, that same price level becomes the new support and a good place to set stop losses for long positions.
In the Sep 23 issue we discussed a chart pattern known as the Head and Shoulders (H&S) and showed a chart of SPY (the S&P 500 index tracking stock), which had just broken the neckline of the H&S. Upon discussing the predicted drops of a H&S pattern upon breaking the neckline, we explained that the predicted drop is equal to the distance from the top of the head to the neckline. In the case of SPY, that equated to a drop down to the $80 area. To refresh your mind, here is the same chart that we discussed last week:
Since the top of the head in this pattern was approximately $96 and the neckline was around $88.00, the predicted drop of SPY was approximately 8 points below the neckline ($96 - $88). This equaled a predicted drop to around $80. Well, take a look at the low of SPY exactly one week later:
Notice how the low of SPY was exactly $80! Therefore, the H&S followed-through completely. Pretty cool, isn't it? Even more interesting is the fact that the completion of the H&S pattern on September 30 probably marked the short-term low in the S&P. In fact, today's market action was very bullish and sets up the market for some significant follow-through to the upside.
As you would probably agree, the market has been very challenging to trade during the past few weeks. Even though the market has been in a downtrend, it has been difficult to profit on both the long AND short side of the market because most of the selling has occurred with gaps or fades on the gaps, as opposed to steady intraday downtrends. The end result was a lot of choppiness without follow-through in either direction. Despite these conditions, there were two interesting things we began to notice that indicated to us that a short-term bottom was probably near.
The first indicator was volume, which usually precedes price. Through paying attention to volume, we noticed that the heavier volume days were occurring on up days, while most of the lighter volume days were sideways to down. Second, we noticed that even though the market kept gapping down or selling off in the morning, there was not much selling momentum to push prices lower throughout the day. Both of these signals indicated to us that the sellers were starting to dry up, thereby enabling the market to rally on the slightest bit of buying interest. In other words, the bears were getting worn out. While this may not be a tangible technical indicator, it is definitely an observation that you do not want to ignore because those two signals typically precede a big rally. While many traders were viewing the weakness of the past week as short-term breaks of support, a look further back to the end of July indicated that rather than breaking support, the market was actually basing on support that was already established. The markets have been creating a new support base through the double bottom that was put in during the past few days in all the major market indices. This resulted in many shorts getting trapped at the lows when the markets rallied above the highs of September 30.
Given the signals discussed above, we were not surprised to see the big rally that occurred today (October 1) in SPY and DIA, both of which really gained momentum after breaking the highs of September 30. Today's rally in SPY and DIA was even more important than the one we saw on September 25 and 26 because today's closing prices put them both above the upper channel resistance of the downtrends on their respective daily charts, whereas last week's rally fizzled out when prices rallied into that same trendline resistance. The Nasdaq also had a strong rally today, but has been lagging the S&P during the past several days. As such, QQQ has not yet broken the upper channel resistance of the trendline, but is very close to doing so. Going into the coming week, any rally above today's highs will break the downtrend. Below are daily charts of four of the major ETFs we trade on a regular basis: SPY, DIA, QQQ, and SMH (all of which were profitable intraday and swing trades today for our subscribers):
Although the daily charts are looking great for most of the major market indices, it is not yet safe to say the bear market has ended because resistance has not yet been broken on the longer term weekly charts. Remember that the longer the time horizon, the more significant the chart pattern becomes. Therefore, let's keep a close eye on the weekly charts, especially QQQ which is close to breaking the weekly resistance. When these resistance levels start getting broken on the weekly charts of the major indices, we could really start to see some major buying. Until then, we will continue to be cautiously long unless SPY or DIA breaks back down below the resistance levels that were just broken. These trendlines are good buy stops to go long (such as with QQQ and SMH) and are also a logical place for stop losses once the index breaks the trendline. Keep in mind that when an index or stock breaks resistance, that same price level becomes the new support and a good place to set stop losses for long positions.
Richk,
We have only traded UTH a few times and have found it to be a better trading platform for multi-day "swing" trades than for intraday trades due to its light average daily volume. Although its volume has been steadily increasing during the past several months (as awareness grows), the volume is still a bit too light to get decent spreads for intraday scalping (unless you are trend trading intraday).
Remember that one of the great benefits of trading light volume ETFs as opposed to individual stocks is that price manipulation is very difficult with ETFs due to the arbitrage traders who keep prices in line with their respective sector indexes.
To answer your question about which index to follow, the closest index to follow would be the Dow Jones Utility Index, which is $DJU on many trading platforms.
We have only traded UTH a few times and have found it to be a better trading platform for multi-day "swing" trades than for intraday trades due to its light average daily volume. Although its volume has been steadily increasing during the past several months (as awareness grows), the volume is still a bit too light to get decent spreads for intraday scalping (unless you are trend trading intraday).
Remember that one of the great benefits of trading light volume ETFs as opposed to individual stocks is that price manipulation is very difficult with ETFs due to the arbitrage traders who keep prices in line with their respective sector indexes.
To answer your question about which index to follow, the closest index to follow would be the Dow Jones Utility Index, which is $DJU on many trading platforms.
Richk,
Regarding your question about whether to follow COMPX or just NDX, it is our opinion that just following NDX is sufficient because that is the index that QQQ is comprised of and is also the index around which the futures are based on.
Regarding your question about whether to follow COMPX or just NDX, it is our opinion that just following NDX is sufficient because that is the index that QQQ is comprised of and is also the index around which the futures are based on.
Hi Kevin,
We usually set sell targets upon entering the trade, which are often based upon simple support or resistance levels, including moving averages. Unfortunately, choppy market conditions have forced us to change our profit targets more than usual, but we typically use trailing stops in order to lock in profits if we change our price target.
Deron
We usually set sell targets upon entering the trade, which are often based upon simple support or resistance levels, including moving averages. Unfortunately, choppy market conditions have forced us to change our profit targets more than usual, but we typically use trailing stops in order to lock in profits if we change our price target.
Deron
Yesterday started out in typical choppy fashion, bouncing between the intraday highs and lows for the first two hours of trading. At around 10:30 am, the S&P dropped below its 20 period MA on the 15-minute chart, which prompted us to initiate a short position in SPY. However, SPY quickly reversed and traded back up into the middle of the range, stopping us out for a small loss. During the same time period, the Nasdaq actually sold off all the way down to and dropped below the low of September 30. However, the quick recovery back above the 20 MA in the S&P indicated to us there was some buying interest in the markets. It was as if the market did not want to go any lower, despite the technical weakness. This prompted us to go to cash and watch carefully for any signs of a breakout.
Going into the lunchtime doldrums, we noticed bullish ascending triangle patterns forming on both the S&P and the Dow, which prompted us to set a buy stop order on DIA in the event it broke the highs of the prior two days. We have outlined the ascending triangle pattern we were looking at in the early morning. Notice how the rally took off upon breaking out of the triangle pattern:
The price target for a rally upon breaking out of a bullish ascending triangle is typically equal to the distance from the top of the triangle to the bottom. In the case of SPY (above), the predicted rally was just under 3 points. Notice how the prices rallied almost exactly three points beyond the triangle upon breaking out.
After the big rally we saw yesterday, we would not be surprised to see the market take a bit of a break today and consolidate before going higher. However, if new highs are established within the first hour of trading, the momentum could continue and enable another trending day today. There was positive news from DELL after the close yesterday, so that should help in solidifying yesterday's gains. One thing is for certain. . .it sure felt good to finally be able to get a bit aggressive after being patient and stalking the market for so long. Let's see if this pig can fly!
Since we are currently in four swing trades from overnight, there are no additional swing trades we are looking to enter today. By managing more than four swing trades at any given time, we lose efficiency. Instead of entering new trades, we will focus on managing our existing trades for maximum profits.
If you did not enter any of yesterday's swing trades with us, you could still enter today and use the same stop prices, but realize there is a higher degree of risk in doing so because it is the second day of the rally. Each successive day of a rally always brings increased risk with new long entries.
Open Positions:
DIA long - bought 78.10 (on Oct. 1), stop at 77.30, no specific target yet; will trail a stop
SPY long - bought 83.75 (on Oct. 1), stop at 82.65, no specific target yet; will trail a stop
SMH long - bought 19.97 (on Oct. 1), stop at 19.60, no specific target yet; will trail a stop
QQQ long - bought 21.18 (on Oct. 1), stop at 20.90, no specific target yet; will trail a stop
Closed Positions:
To lock in profits and reduce risk, we sold HALF the original share size of each of the above swing trades yesterday, but are still long the remaining HALF shares overnight. Here are the sell prices and profits for each of the above swing trades:
DIA long - sold HALF at 79.22, closed with + 1.12
SPY long - sold HALF at 84.86, closed with + 1.11
SMH long - sold HALF at 20.34, closed with + 0.37
QQQ long - sold HALF at 21.55, closed with + 0.37
Going into the lunchtime doldrums, we noticed bullish ascending triangle patterns forming on both the S&P and the Dow, which prompted us to set a buy stop order on DIA in the event it broke the highs of the prior two days. We have outlined the ascending triangle pattern we were looking at in the early morning. Notice how the rally took off upon breaking out of the triangle pattern:
The price target for a rally upon breaking out of a bullish ascending triangle is typically equal to the distance from the top of the triangle to the bottom. In the case of SPY (above), the predicted rally was just under 3 points. Notice how the prices rallied almost exactly three points beyond the triangle upon breaking out.
After the big rally we saw yesterday, we would not be surprised to see the market take a bit of a break today and consolidate before going higher. However, if new highs are established within the first hour of trading, the momentum could continue and enable another trending day today. There was positive news from DELL after the close yesterday, so that should help in solidifying yesterday's gains. One thing is for certain. . .it sure felt good to finally be able to get a bit aggressive after being patient and stalking the market for so long. Let's see if this pig can fly!
Since we are currently in four swing trades from overnight, there are no additional swing trades we are looking to enter today. By managing more than four swing trades at any given time, we lose efficiency. Instead of entering new trades, we will focus on managing our existing trades for maximum profits.
If you did not enter any of yesterday's swing trades with us, you could still enter today and use the same stop prices, but realize there is a higher degree of risk in doing so because it is the second day of the rally. Each successive day of a rally always brings increased risk with new long entries.
Open Positions:
DIA long - bought 78.10 (on Oct. 1), stop at 77.30, no specific target yet; will trail a stop
SPY long - bought 83.75 (on Oct. 1), stop at 82.65, no specific target yet; will trail a stop
SMH long - bought 19.97 (on Oct. 1), stop at 19.60, no specific target yet; will trail a stop
QQQ long - bought 21.18 (on Oct. 1), stop at 20.90, no specific target yet; will trail a stop
Closed Positions:
To lock in profits and reduce risk, we sold HALF the original share size of each of the above swing trades yesterday, but are still long the remaining HALF shares overnight. Here are the sell prices and profits for each of the above swing trades:
DIA long - sold HALF at 79.22, closed with + 1.12
SPY long - sold HALF at 84.86, closed with + 1.11
SMH long - sold HALF at 20.34, closed with + 0.37
QQQ long - sold HALF at 21.55, closed with + 0.37
After coming down to the 20 period moving averages on the 15 minute charts, the Naz and S&P found support. At 12:41 pm, we took profits on HALF the shares of our long swing trades in the following ETFs: QQQ, SPY, DIA, and SMH. We also raised the stops on the remaining half of the shares as follows:
DIA - stop 77.90
SPY - stop 83.50
SMH - stop 20.25
QQQ - stop 21.30
Will continue to trail stops as prices rise and report final P/L upon closing the trades.
DIA - stop 77.90
SPY - stop 83.50
SMH - stop 20.25
QQQ - stop 21.30
Will continue to trail stops as prices rise and report final P/L upon closing the trades.
<b>ETFs - Analysis of SWH</b>
As part of our continuing weekly analysis of various ETFs, we chose SWH (Software Index HOLDRS Trust) for analysis this week. Since we cover a different ETF nearly every week, you can view the Archives section of our web site to read about ETFs previously discussed. 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.
SWH is the ticker symbol for the Software Index HOLDRS Trust and is one of seventeen different HOLDRS issued by Merrill Lynch. It is also one of the few ETFs we follow that is approaching its 50-week moving average, thereby breaking the upper channel resistance of the downtrend from the highs of January. The average daily volume of SWH is 500k shares, making it one of the top five most liquid HOLDRS. Just like an individual stock, the volume of SWH on any given day varies based on interest in the sector. Since MSFT, a heavily weighted component of SWH, had positive news after the close last Friday, today's volume in SWH was 50% greater than average, not to mention it gapped up nearly 4% on the open.
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.
SWH is comprised of individual stocks related to software development, distribution, and application. The largest components of SWH consist of household names such as Microsoft and Oracle. If you want to invest in companies that are in the Software index, buying SWH represents a much lower risk investment than buying individual stocks within the sector. The SWH index is comprised of 20 different stocks within the Software sector.
Here is detailed look at the composition of SWH. 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 SWH.
Shares: This is the quantity of shares of each individual stock that comprise one round-lot order of SWH. 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 151 shares of stock that you see listed above equals the exact number of shares that you receive by buying 100 shares of SWH. By purchasing 100 shares of SWH, you are buying 15 shares of Microsoft (MSFT), 8 shares of Peoplesoft (PSFT), and the specified number of shares in each of the other 18 stocks that comprise SWH. By owning SWH, 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, based on the closing prices of Monday, November 4.
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 SWH. As of today's close, the sum of the market value was $2,888.05. Taking that number and dividing by 100 shares equals the current price of one share of SWH. Here is how we derive the price of SWH: $2,888 (market value) / 100 (one round lot of shares) = $28.88 per share of SWH. Notice that the closing price of SWH today was $28.86, which represents a 2 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, if Microsoft had a really strong up day but the rest of the Software stocks did not rally much, it would result in an increase in the percentage weighting of Microsoft 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 SWH. As you are trading SWH, 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 SWH, especially when the price of one of the stocks in SWH 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 SWH if the spread is large. Based on today's closing price, any price below $28.88 would represent a discount to the current price on SWH, 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 SWH. Notice how we have the stocks sorted by percentage change so that we can quickly see who the best and worst performers are within SWH. We can then compare their performance with their percentage weighting to predict short-term price movement of SWH in relation to the Software index (GSO.X):
Notice that even though Intuit (INTU) dropped nearly 4% today, SWH still closed up by more than 3.9% because the percentage weighting of MSFT, which rallied over 5%, is so high. That's the beauty of the diversification factor of ETFs! 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. We will analyze a different ETF next week, so use the coming week to master SWH.
As part of our continuing weekly analysis of various ETFs, we chose SWH (Software Index HOLDRS Trust) for analysis this week. Since we cover a different ETF nearly every week, you can view the Archives section of our web site to read about ETFs previously discussed. 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.
SWH is the ticker symbol for the Software Index HOLDRS Trust and is one of seventeen different HOLDRS issued by Merrill Lynch. It is also one of the few ETFs we follow that is approaching its 50-week moving average, thereby breaking the upper channel resistance of the downtrend from the highs of January. The average daily volume of SWH is 500k shares, making it one of the top five most liquid HOLDRS. Just like an individual stock, the volume of SWH on any given day varies based on interest in the sector. Since MSFT, a heavily weighted component of SWH, had positive news after the close last Friday, today's volume in SWH was 50% greater than average, not to mention it gapped up nearly 4% on the open.
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.
SWH is comprised of individual stocks related to software development, distribution, and application. The largest components of SWH consist of household names such as Microsoft and Oracle. If you want to invest in companies that are in the Software index, buying SWH represents a much lower risk investment than buying individual stocks within the sector. The SWH index is comprised of 20 different stocks within the Software sector.
Here is detailed look at the composition of SWH. 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 SWH.
Shares: This is the quantity of shares of each individual stock that comprise one round-lot order of SWH. 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 151 shares of stock that you see listed above equals the exact number of shares that you receive by buying 100 shares of SWH. By purchasing 100 shares of SWH, you are buying 15 shares of Microsoft (MSFT), 8 shares of Peoplesoft (PSFT), and the specified number of shares in each of the other 18 stocks that comprise SWH. By owning SWH, 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, based on the closing prices of Monday, November 4.
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 SWH. As of today's close, the sum of the market value was $2,888.05. Taking that number and dividing by 100 shares equals the current price of one share of SWH. Here is how we derive the price of SWH: $2,888 (market value) / 100 (one round lot of shares) = $28.88 per share of SWH. Notice that the closing price of SWH today was $28.86, which represents a 2 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, if Microsoft had a really strong up day but the rest of the Software stocks did not rally much, it would result in an increase in the percentage weighting of Microsoft 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 SWH. As you are trading SWH, 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 SWH, especially when the price of one of the stocks in SWH 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 SWH if the spread is large. Based on today's closing price, any price below $28.88 would represent a discount to the current price on SWH, 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 SWH. Notice how we have the stocks sorted by percentage change so that we can quickly see who the best and worst performers are within SWH. We can then compare their performance with their percentage weighting to predict short-term price movement of SWH in relation to the Software index (GSO.X):
Notice that even though Intuit (INTU) dropped nearly 4% today, SWH still closed up by more than 3.9% because the percentage weighting of MSFT, which rallied over 5%, is so high. That's the beauty of the diversification factor of ETFs! 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. We will analyze a different ETF next week, so use the coming week to master SWH.
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.
BBH is the ticker symbol for the Biotechnology Index HOLDRS Trust and is one of seventeen different HOLDRS issued by Merrill Lynch. It is also one of the few ETFs we follow that is well above its 20 week moving average, indicating a lot of relative strength to the broad market. The average daily volume of BBH is 1.8 million shares, making it the second most liquid HOLDRS behind SMH. Although the relatively wide spread of BBH makes it difficult to "scalp" for tiny profits, it is a great "stock" to trade for longer time frames such as multiple hours or days. In fact, when the Biotech index is having a strong-trending day, BBH will often move 4 or 5 points intraday. Therefore, it is common to realize decent profits from BBH with even a small position of 100 shares.
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.
BBH is comprised of individual stocks related to Biotechnology research, development, and production. The largest components of BBH consist of large-cap companies you have probably heard of such as Amgen and Biogen. If you want to invest in companies that are in the Biotech index, buying BBH represents a much lower risk investment than buying individual stocks within the sector. The index is comprised of 19 different stocks within the Biotech sector.
Here is detailed look at the composition of BBH. 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 BBH.
Shares: This is the quantity of shares of each individual stock that comprise one round-lot order of BBH. A round-lot order is always equal to exactly 100 shares, which is the minimum quantity of shares you can purchase. For example, the total of 269.31 shares of stock that you see listed above equals the exact number of shares that you receive by buying 100 shares of BBH. By purchasing 100 shares of BBH, you are buying 13 shares of Biogen (BGEN), 16 shares of Chiron (CHIR), and the specified number of shares in each of the other 17 stocks that comprise BBH. By owning BBH, 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, based on the closing prices of Monday, October 21.
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 BBH. As of today's close, the sum of the market value was $8,958.05. Taking that number and dividing by 100 shares equals the current price of one share of BBH. Here is how we derive the price of BBH: $8,958 (market value) / 100 (one round lot of shares) = $89.58 per share of BBH. Notice that the closing price of BBH today was $89.60, which represents a 2 cent premium 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. However, it is difficult to arbitrage an ETF such as BBH because of the wide spread that is usually present; it works much better as a multi-day swing trade or longer-term investment.
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 Amgen had a really strong up day because of a new drug but the rest of the Biotech stocks did not rally much, it would result in an increase in the percentage weighting of Amgen 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 BBH. As you are trading BBH, 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 BBH, especially when the price of one of the stocks in BBH 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 BBH if the spread is large. For example, any price below $89.58 represents a discount to the current price on BBH, while any price above that level indicates 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 BBH. Notice how we have the stocks sorted by percentage change so that we can quickly see who the best and worst performers are within BBH. We can then compare their performance with their percentage weighting to predict short-term price movement of BBH in relation to the Biotech index:
Notice that even though Enzon (ENZN) dropped over 5% today, BBH still closed up 0.64% because the percentage weighting of ENZN is low and some of the heavier weighted stocks such as BGEN closed positive on the day. 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.
BBH is the ticker symbol for the Biotechnology Index HOLDRS Trust and is one of seventeen different HOLDRS issued by Merrill Lynch. It is also one of the few ETFs we follow that is well above its 20 week moving average, indicating a lot of relative strength to the broad market. The average daily volume of BBH is 1.8 million shares, making it the second most liquid HOLDRS behind SMH. Although the relatively wide spread of BBH makes it difficult to "scalp" for tiny profits, it is a great "stock" to trade for longer time frames such as multiple hours or days. In fact, when the Biotech index is having a strong-trending day, BBH will often move 4 or 5 points intraday. Therefore, it is common to realize decent profits from BBH with even a small position of 100 shares.
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.
BBH is comprised of individual stocks related to Biotechnology research, development, and production. The largest components of BBH consist of large-cap companies you have probably heard of such as Amgen and Biogen. If you want to invest in companies that are in the Biotech index, buying BBH represents a much lower risk investment than buying individual stocks within the sector. The index is comprised of 19 different stocks within the Biotech sector.
Here is detailed look at the composition of BBH. 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 BBH.
Shares: This is the quantity of shares of each individual stock that comprise one round-lot order of BBH. A round-lot order is always equal to exactly 100 shares, which is the minimum quantity of shares you can purchase. For example, the total of 269.31 shares of stock that you see listed above equals the exact number of shares that you receive by buying 100 shares of BBH. By purchasing 100 shares of BBH, you are buying 13 shares of Biogen (BGEN), 16 shares of Chiron (CHIR), and the specified number of shares in each of the other 17 stocks that comprise BBH. By owning BBH, 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, based on the closing prices of Monday, October 21.
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 BBH. As of today's close, the sum of the market value was $8,958.05. Taking that number and dividing by 100 shares equals the current price of one share of BBH. Here is how we derive the price of BBH: $8,958 (market value) / 100 (one round lot of shares) = $89.58 per share of BBH. Notice that the closing price of BBH today was $89.60, which represents a 2 cent premium 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. However, it is difficult to arbitrage an ETF such as BBH because of the wide spread that is usually present; it works much better as a multi-day swing trade or longer-term investment.
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 Amgen had a really strong up day because of a new drug but the rest of the Biotech stocks did not rally much, it would result in an increase in the percentage weighting of Amgen 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 BBH. As you are trading BBH, 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 BBH, especially when the price of one of the stocks in BBH 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 BBH if the spread is large. For example, any price below $89.58 represents a discount to the current price on BBH, while any price above that level indicates 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 BBH. Notice how we have the stocks sorted by percentage change so that we can quickly see who the best and worst performers are within BBH. We can then compare their performance with their percentage weighting to predict short-term price movement of BBH in relation to the Biotech index:
Notice that even though Enzon (ENZN) dropped over 5% today, BBH still closed up 0.64% because the percentage weighting of ENZN is low and some of the heavier weighted stocks such as BGEN closed positive on the day. 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.