Stalking Semiconductor Short

By IBTimes Staff Reporter | August 18 2009 1:02 PM

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 its 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.

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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 free fall 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 semi's 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 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. Which 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 more riskier September month (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 more higher than currently. 99.7 on SPY would be nice. So maybe 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...