 The ETF Authority for Monday, April 7th, 2003 Volume 2, Issue #14 Published weekly on Sunday evening, The ETF Authority is a short-term swing trading newsletter that can help you profit from some of the most heavily-traded securities on the market -- exchange-traded funds (ETFs). *Please
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MARKET SUMMARY ECONOMIC ANALYSIS The main event was the March non-farm payrolls and unemployment report. The unemployment rate held steady at 5.8%, which was better than expected. However, unless things get better quickly, the increase in claims later in the month will probably lead to a jump in unemployment next month. Payrolls were worse than expected, falling 108,000. February was also revised lower by 49,000. The market did not really fall that hard upon hearing the news, as a great deal of market participants appeared to have been betting on an even worse result. Next week does not see much action until Friday unless you are a currency expert (trade balance due Thursday). Retail sales are due out on Friday. Market consensus is for a 0.2% improvement after a -1.6% reading in February. Ex-autos are forecast to increase 0.4%. Bad weather may have continued to hamper sales, and therefore we could see weaker-than-expected retail results. Slightly lower energy prices will also be a drag on the numbers. PPI and consumer sentiment are also due. Good news on the war front will help both figures, and core PPI should remain benign. There are virtually no signs of inflation outside of the energy sector. The CRB is down more than 8% from its early 2003 peak, with oil off more than 25% from its peak. WHERE DO WE GO FROM HERE? Unfortunately, there's all reward and little risk according to these people. No risk that Iraq causes major problems in Baghdad. No risk of a terrorist strike in America. No risk of large actions and reactions in Israel. No risk that the economy doesn't rebound even if the war ends quickly. The chart pattern since the bottom in last July is definitely consolidatory. The minor new low in October in the broad market has now held for nearly six months. It should hold a bit longer than that. Although I do see risk for a dip to start the week, the triangle currently being traced out shows potential for a run at the mid-900s in the S&P 500 in the coming month or two. Timing calls for a turn in June, though we might start falling before then. Do not forget the old maxim: "Sell in May and go away." It works -- stocks do lousy from May to October, and this is still a bear market!
Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...
3. ETF RELATIVE STRENGTH MONITOR The noises of war continue to wreak havoc with weekly relative strength. Energy-related issues tumbled towards the bottom of our list as the price of oil sank. Most of the other weakest sectors were those centered on the fixed income markets. These two groups accounted for six of the bottom seven performers last week. Only Japanese WEBs broke that perfect record. Continuing to hold on the strong end of the spectrum were health-related issues, led by the two Biotech funds and the Pharmaceutical HOLDRs (PPH, $76.75). There were two other big movers: The Financial SPDR (XLF, $21.99) and the Russell 2000 Growth Fund (IWO, $39.70). Most technology-oriented products managed healthy gains as well, moving to the middle of the pack. Retail HOLDRs (RTH, $73.90) racked up a 4.01% gain last week, making it the top performer in our universe during that time period. Over the past four weeks, its average rank has only been exceeded by the Biotech funds. Although at first blush RTH appears to be rather overbought, I do not have a clear enough sell signal to take any overt action in that arena. See Section #4 below for a new Relative Strength Monitor based trade. Here is this week's ETF Relative Strength Monitor...
RELATIVE STRENGTH ETF TRADING IDEA: SELL SHORT NASDAQ-100 TRUST (QQQ, $26.05) WHILE AT THE SAME TIME PURCHASING S&P 500 SPDR ($88.22) WHEN THE PRICE RATIO OF SPY DIVIDED BY QQQ EQUALS 3.26 (CURRENTLY 3.387)
This is a new kind of trade for my readers. It is basically a spread trade. You are neither long nor short when you take this trade. Instead, you are betting that the broad stock market, as measured by SPY, will outperform the technology sector, as measured by QQQ. If you look at the chart, you can see that the downtrend in the ratio was very powerful in late 2003, and while that trend continued in a fifth-wave cycle this year, it was somewhat less impulsive. We have not yet completed this fifth wave, though the short-term trend has been in favor of SPY. An increasing ratio means that SPY is outperforming QQQ. There is probably one more new low in this trend. I would put this trade on now, except there appears to be a need for one more leg to complete wave-5. Momentum confirmed the recent low, which is unlikely to occur at the end of wave-5. Put this trade on after a new low is achieved. The reasons for putting this trade on are:
******************************************** It is impossible to determine
an exact profit potential on this trade because your entry prices will
affect the percentage gain and loss. However, the likely profit will be
around $275, while the risk on the losing side will be about $50. Since this
idea might take several months to develop, you might wish to make a larger
investment (especially since this involves two round-trip trades).
I am going to try to short this ETF again. We did not succeed in getting a sale off last week because the fund opened sharply lower. Our new relative strength section really is what focused me in on this trading opportunity. This time, we have even better sell signals. Although IBB was the third strongest performer last week, its nearly 12% gain over the past 13 weeks, coupled with a bearish engulfing line on Friday and momentum divergences, put this fund at high risk for a quick and sharp drop. My only concern is that stocks may ease a bit, and Biotechs have been a pretty decent defensive play. However, the technical signals cannot be ignored here. In summary, our reasons for shorting IBB are as follows:
******************************************** Assuming you sell at $53.04,
Friday's close, and exit the trade at our $50.42 target, you will pocket a
$262 gain from this trade, or +4.9%.
Although the S&P 100 is not an ETF, it is an index, which fits into our charter. I would offer this trade using the S&P 500 Index SPDR (SPY, $88.22), but there are no options listed for it.
When you sell an options strangle, that means you expect the options to expire worthless. I am recommending selling 490 April calls and 400 April puts. As long as the OEX closes between those two levels at expiration on April 19, 2003, you will pocket the full premium from both of these sales. I expect the large triangle shown above to hold this market over the coming 2+ weeks. That triangle is currently bounded by about 487 on the upside and 401 at the lower end. The likely pattern over the coming week or two is a dip lower early this week, followed by a sharp rally. I will track the options closely because if either side starts approaching zero, then I will close that side. The reasons I want to sell this strangle are:
******************************************** Assuming you sell for a combined
$1.15 for the two options, you will make $230 if they expire worthless.
5. CONTINUED GUIDANCE ON PREVIOUS TRADES PREVIOUS SHORT-TERM IDEAS: SELL SHORT iSHARES NASDAQ
BIOTECHNOLOGY FUND (IBB, $53.04) SELL SHORT ENERGY SPDRs (XLE,
$22.39) This trade is worth holding onto. XLE is holding below its continuation triangle and the inside week shows a further loss of upside momentum. Its relative weakness when compared with other sectors, in an up week for stocks, favors holding our short trade. However, I am tightening the stops a bit. The new stops will be $0.10 above last week's high price of $22.78. --------------------- BUY THE JAPAN WEBS (EWJ,
$6.50) ON A FURTHER PULLBACK --------------------- Thanks again for reading this week's issue, and good trading in the week ahead!
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