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Thomas H. Kee Jr., is President and CEO of Stock Traders Daily. The Stock of the Week Strategy offered by Stock Traders Daily may be the best performing strategy on the market since December, 2007 (before the credit crisis), and "The Investment Rate" is arguably the best measure of the... More
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  • The Poor mans Flash Quote: (GS), (AAPL), (CSCO), (QLD)

    Investors are quickly realizing how double weighted ETFs like DDM, DXD, QLD, QID, SSO, and SDS diverge from the Market over time.  They are usually good at following the market proportionally throughout a single trading day, but because they reset every day, they also diverge over time.  This could present problems for persons interested in holding these over time as well.

    However, a similar problem exists on occasion intraday.  This is especially true when important news events cause the Market to become sporadic, like Cisco Systems (CSCO) did on Thursday.  In turn, that causes volatility levels to rise, and that causes abnormal fluctuations in the underlying entities carried by the double – weighted ETFs.  In addition to core holdings in individual stocks (shown below), these ETFs also hold substantial positions in leveraged options.  That is where the abnormal volatility comes from.

    For example, on Thursday, August 06, 2009 the NASDAQ was lower by 0.66% at 10:20 AM.  QLD, which tracks the NASDAQ intraday, was down 1.66%.  That is a 25% discrepancy.  Why would this happen?  There are a few reasons:

    • Bid and Ask for the ETF.

    • VOL increases.

    • One of the core positions fluctuates wildly.

    First, the Bid and Ask is an issue.  Remember, these are openly traded instruments, just like stocks, and the more buyers out there, the higher the price will go, and vice versa.  So, if there are more people on the Ask, and wanting to sell, the underlying entity will decline more.  In this case, QLD did exactly that.

    Also, VOL, or volatility, is extremely important.  That affects options prices.  It the Market becomes more active, the option prices will usually increase in relation to that.  This can cause the underlying value of the ETF to fluctuate even though the Market itself may not.  However, this is also what causes these ETFs to act as leading indicators quite often.

    The Poor Man’s Flash Quote.

    In fact, that is a key benefit of these ETFs to active traders.  They allow us to determine direction a little bit in advance.  Call them a “Poor Man’s Flash Quote.”  We get a glimpse at where the Market is going a few seconds before the Market actually goes there. 

    I guess the real question is, has Goldman Sachs (GS) created a master program that will catch this discrepancy in advance too?  Maybe that is why these ETFs carry so much volume.  Is it all based on Flash Trading?  Only time will tell, but my guess is that Flash Trading has a lot to do with the volume in these ETFs.

    In relation to my third point, If AAPL were to fluctuate wildly, so would QLD.  The list below shows the major holdings as of 8.5.09.  AAPL was at the top, with over 14% exposure.  It would obviously cause more volatility in the portfolio if it started to gyrate.  AAPL, by the way, is usually at the top of this list.

    In the end, all we can be sure of is that these ETFs are designed to track the intraday moves, and after the Market has settled down, they usually do.  Depending on the basis of the ETF, short or long, these usually perform in line with their purpose intraday after the news has settled into the Market.  However, they will move more aggressively than the Market from time to time, and that can be used to our advantage.  They are leading indicators, and they could be used to anticipate direction.

    Practice using them by watching them closely, and compare them to the Markets to see how they work.  Active Traders can use this effectively.

    List of holdings in QLD as of 8.5.09:

     

    AAPL APPLE INC COM STK NPV

    14.13%

    QCOM QUALCOMM USD0.0001

    6.29%

    MSFT MICROSOFT USD0.000125

    5.02%

    GOOG GOOGLE INC COM STK

    4.55%

    CSCO CISCO SYSTEMS INC COM STK

    3.14%

    RIMM RESEARCH IN MOTION COM

    3.11%

    ORCL ORACLE CORP COM STK

    3.06%

    GILD GILEAD SCIENCES USD0.001

    2.87%

    TEVA TEVA PHARMACEUTICAL ADR

    2.60%

    INTC INTEL CORP COM STK

    2.54%


    Author has no conflicts to disclose.
    Aug 06 11:32 AM | Link | Comment!
  • Market analysis for Wednesday: (QQQQ), (SPY), (DIA)

    Our combined analysis for Wednesday tells us that the Market has a high probability of increasing aggressively if initial support levels remain in tact.  The initial channel, between initial support and initial resistance, is tight for both the S&P and the NASDAQ.  That tells us the Market will probably continue to back and fill initially.  Our combined analysis tells us to expect the Market to begin the day with a bias to increase on Wednesday, so reasonably a test of resistance could occur first.  However, afterwards, a choppy pattern could prevail like it has in days past.  Unique to Wednesday though, the tired pattern is becoming just that, tired.  The upside potential is strong given a conversion that has occurred in the mid term chart patterns.  If support holds, those charts tell us to expect the Market to increase aggressively.  A moderate pullback and a test of neutral mid term support lines is likely if mid term up-channel support breaks lower.  However, given the combination of indicators stemming from the near, mid, and long term charts in all three markets, that seems like a less likely probability.  The balance rests of the shoulders of initial support.  Although resistance is likely to be tested first, initial support is extremely important.  It needs to hold for the Market to move higher aggressively.  If it does, brace for a surge eventually.  Clearly that would require initial resistance to break higher in the S&P and the NASDAQ too, but that would not take much.  The dribble of riding resistance lines higher will likely change soon according to our combined analysis.  If that happens, and support holds, we expect a breakout to the upside.  Treat 9313 as inflection.  If it holds expect a surge towards 9510 eventually, with a stall in the middle.  However, if 9313 breaks lower, expect a pullback to 9148, expect the Market to stabilize there, and then expect it to reverse higher again afterwards.  Either way, 9313 is the key and it will provide actionable trading plans for proactive investors accordingly.

    Author has no conflicting positions.

    Tags: DIA, QQQ, SPY, QID, QLD, DDM, DXD, nasdaq, dow, s$p
    Aug 04 6:27 PM | Link | Comment!
  • Get a Free Real Time Trading Report


    Given recent Market action, I think everyone should receive a free real time trading report on a stock that they have been following.  I usually charge for these, but I think it is important that everyone has a plan going into the next few weeks. 

    If you have an interest in any stock or ETF, use this link to get a free report.  It tells you how the stock should be traded, and that gives you a plan.  You must have a plan, always.  That includes, specifically, risk controls.

    Free Report:

    http://ultimatetraderchallenge.com/guest/subscribe

    Good Trading.

    Thomas Kee.

    Aug 04 5:25 PM | Link | Comment!
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