Stalking a Semiconductor Short

The Semiconductor ETF (SMH) chart I posted this weekend really caught my attention; I do not look at this ETF every week, so it was the first time I looked at it in maybe 3 weeks and I wanted to buy short exposure Sunday night the minute it posted on my computer screen. It was creamed for a nice 4% yesterday and has since rebounded a bit - recall semiconductors are the one area that institutions will pile into each time they see a recovery on the horizon. One could argue the "recovery" thus far in semis is mostly inventory restocking; we won't know until we look back 6-9-12 months from now if it's head fake or real (or the third option nowadays, China-driven) But whichever, this sort of gap creates saliva on the lips... my downside target should be very obvious.

I am looking at a few ways to go short - the obvious and easy is short SMH ETF. Incredibly there is also a 2x inverse ETF specifically against the Semi ETF: Ultrashort ProShares Semiconductor (SSG). However, the past two years have taught us the evils of 2x, 3x ETFs - unless the market or that subsector of the market is in freefall, they usually only suck money out of your wallet. Ironically, SMH broke its 20 day moving average yesterday before making a half-hearted (thus far) effort to rally back over, while SSG broke above its 20 day moving average before faltering today. So if semis weaken in the coming days, they should both technically confirm at about the same time. (please note TA on inverse ETFs is relatively useless)

A third option are puts, which I believe will be how I will approach it. I need something that has relatively high volume, since the "simulator" I use, uses 10% of the real life volume for my purchases or sales. That is why I like SPY - its very liquid. Buying options on anything else is much more of a chore. (remember, one arm tied behind back on some strategy) Therefore, the puts I am interested in October do not have enough volume for me to make a purchase. Hence I am stuck in the far riskier September (riskier than October because I have to be correct on both direction and time). The only one with a lot of volume today is September 25 puts - (SMHUE) bid 1.26/ask 1.27 as I type.

Since I think the S&P will fill the "gap" at just under S&P 1000, I will probably make a purchase of these later in the afternoon (or tomorrow), hopefully with the market just a bit higher than currently. 99.7 on SPY would be nice. So maybe it will be at our post 3:30 PM daily feeding frenzy upward or in the early morning tomorrow.

Ironically my favorite stocks on the long side at this moment are semiconductor stocks, but in a very narrow subsector. Hewlett Packard (HPQ) reports tonight, which should cause technology to spike - or not - after the bell. Generally they always do well on earning reports.

No position but stalking...

Comments

[Suzanne H.]

TraderMark -- great trade, and I am looking to add to my double inverses (FXP/EEV/DUG) with SRS and SSG. I find TA on inverse and even more so the double inverse ETFs highly useful. They only suck money out if you don't catch a trend -- so any short-term trend following system with a volatility stop works and position sizing risking at most 1% per trade works great with these. I do this all the time -- never risking more than 0.5% per trade for clients. I wouldn't go any longer than a 21 dma on these. Cutting losses is crucial and should be automated -- cause that is when even if you are right and the price does eventually drop, what you lose in waiting while the math works against you isn't worth it.

Speaking of gaps, another one that might get you salivating is India legacyfunds.wordpress..../ and seekingalpha.com/insta...

2009 Aug 18 05:42 PM

[Drew Arnold]

Looks great as a short until that S&P gap is filled. Out of curiosity, and maybe this was on one of your other posts and I missed it, will you be buying up some long positions on this pullback or shorting it all the way? I'm subscribing to a mixture of the two, but I was curious as to what you thought.

2009 Aug 18 09:20 PM

[TraderMark]

Depends on how we act around S&P 950s to be honest. If we reach S&P 950s of course :)


On Aug 18 09:20 PM Drew Arnold wrote:

> Looks great as a short until that S&P gap is filled. Out of
> curiosity, and maybe this was on one of your other posts and I missed
> it, will you be buying up some long positions on this pullback or
> shorting it all the way? I'm subscribing to a mixture of the two,
> but I was curious as to what you thought.

2009 Aug 19 12:36 PM

[Bill L.]

This sector indeed looks owned on presumptions that seem unrealistic. In general the sectorst hat have been leading are now lagging with many of the smaller issues in tech looking much weaker than the Ps. Many of the smaller issues in the sector are implying expected growth rates or 10-15% or higher... If they couldn't grow at that pace in '06 and '07... good luck pulling that off in '10 and '11. The time to own them was 6 months ago when the risk reward was much higher. Buyers beware.

2009 Aug 19 01:56 PM