Deconstructing the SMH

Outperforming the Qs and now at the 200 DSMA of the ratio. Prospects look encouraging.

Continuing our study of the ETFs, today we look at SMH, the semiconductor offering. Currently trading about 12M shares a day, with penny spreads, the SMH provides good liquidity and fast fills. Like many of the ETFs previously examined, current price is hovering around the 20 DSMA, with the 50DSMA acting as intermediate resistance. Option open interest (discussed later) is thin relative to the Qs and XLF, with total open interest less than 350,000 contracts. Bid/ask spreads on the near ATMs are .02-03, but there is not active interest in all the exchanges, so fills midstream are seldom. SSG is the x2 ultrashort ETF for the SMH, but it typically trades less than 50,000 shares a day on .12-.19 spreads, so it's viability for scalpers and active traders is very small. Limit orders are always recommended in this type of spread environment, the problem being that when and if the stock starts moving either you'll never get filled, or you'll get filled at a price that's already in the hole within 30 seconds.

The semis are a hardware business and 90% of SMH net assets come from 10 companies, with the top 3 companies accounting for over 60%. Some correlated pair trades possible here, but the ratios are thin. A Qs/SMH divergence pair trade might have better results.

Above is the 3 linear regression study of SMH for daily, 3 day and weekly bars. The lateral consolidation for most of 2008 is clearly evident, and the SMH is demonstrating a resilience not seen in many of the other sectors.

Above is the March open interest configuration, below is April. These look like mostly spreads positions, with a significant skew to the calls, as opposed the previous put/call ratios examined over the past 2 weeks. Open interest in the OTMs drops off dramatically. The OI skew may look different tomorrow as over 5200 April 28 puts have traded today on a previous OI of 2188, so somebody thinks they know something.

Finally, the short interest chart is unusual relative to other ETFs we have examined. Although price is declining, short interest has mirrored the move down. If nothing else, we can take this as a positive sentiment indicator. News for SMH components has been neutral to negative recently, but the technicals portray a bottoming pattern, with a bias to the up side.

Worth keeping an eye on since they have held up so well to date.