The Wagner Weekly
September 9, 2002

Table of Contents

ETFs - Analysis of SMH
Deron's Weekly Report Card
Odds and Ends

ETFs - Analysis of SMH

Beginning this week, we will be analyzing a different ETF in each new issue of The Wagner Weekly. We chose SMH for analysis this week because it is one of the most popular and liquid ETFs, with the exceptions of QQQ, SPY, and DIA. The purpose of this analysis is to enable you to understand the underlying components that comprise each ETF, as well as the bearing each respective stock has on the associated ETF.

SMH is the ticker symbol for Semiconductor HOLDRS Trust and is one of seventeen different HOLDRS issued by Merrill Lynch. In addition, SMH is one of only six HOLDRS that trades an average daily volume of more than 300,000 shares. As explained in the August 19 issue, HOLDRS is an acronym that stands for HOLding Company Depositary ReceiptS (pronounced "holders"). These securities represent ownership in the common stock or American Depositary Receipts (ADRs) of specified companies in a particular industry, sector or group. A complete list of HOLDRS can be found by going to the HOLDRS web site.

Since the Nasdaq is heavily comprised of semiconductor stocks, SMH is typically in play on most days when the Nasdaq is trending. Because individual semiconductor stocks can be very volatile and whippy, we have found that trading SMH is an excellent way to capitalize on significant moves in the SOX (Semiconductor) Index without being subjected to the wild price swings that individual stocks like MXIM and AMAT often have. SMH is one of our most actively traded ETFs and is the source of many profitable trade setups in The Wagner Daily. Since SMH is a composite of many different stocks, it trends better intraday, making technical analysis easier and more accurate.

Here is detailed look at the composition of SMH. An explanation of how to interpret this data is listed below the chart:

Company and Ticker: Pretty self-explanatory. This represents the name of the company and associated ticker symbol for each individual stock that comprises SMH.

Shares: This is the quantity of shares of each individual stock that comprise one round-lot order of SMH. A round-lot order is equal to exactly 100 shares. For example, the total of 150 shares of stock that you see listed above equals the exact number of shares that you receive by buying 100 shares of SMH. So, if you buy 100 shares of SMH, you are buying 22 shares of Texas Instruments (TXN), as well as the specified number of shares in each of the other 19 stocks. By owning SMH, you also will receive dividends, when issued, from any associated stocks. Furthermore, HOLDRS can actually be converted to the underlying quantity of stocks by requesting your broker to do so.

Price: Simply the last price of each stock that is listed, based on the closing prices of Friday, September 6.

Market value: This is found by multiplying the number of shares of each stock times the last closing price. The sum of the porfolio's market value will always equal the current price of 100 shares of SMH. As of Friday's close, the sum of the market value was $2344.36. Taking that number and dividing by 100 shares equals the current price of one share of SMH. Here is how we derive the price of SMH: $2344 (market value) / 100 (one round lot of shares) = $23.44 per share of SMH. Notice that the closing price of SMH on Friday was $23.39, within 5 cents of the actual value of the components.

Percent Weight: Represents the current percentage of the entire portfolio that is represented by that one stock. This percentage will constantly be changing as the market value of each individual stock changes. However, the number of shares of each stock does not change. For example, if Intel had a really strong up day but the rest of the Semis did not rally much, it would result in an increase in the percentage weighting of Intel within the portfolio.

One strategy we have found to be effective is to set up a group of quotes with your data provider that lists each stock within SMH. As you are trading SMH intraday, you will find that watching the performance of the individual stocks enables you to get a better idea of the relative strength or weakness of SMH, especially when the price of one of the stocks in SMH is being heavily affected by news. Below is a screenshot of a market minder that we have set up to follow SMH. Notice how we have the stocks sorted by percentage change so that we can quickly see who the best and worst performers are within SMH. We can then compare their performance with their percentage weighting to predict short-term price movement of SMH in relation to the SOX index:

We recommend you print out this page and study the components within SMH. Once you begin to memorize the individual components and weightings of each stock, you will find significant improvements in your profitability. We will analyze a different ETF next week, so use the coming week to master SMH. After all, there will be a pop quiz and you may need to know how many shares of AMD comprise one round lot of SMH. Anyone know the answer?

Deron's Weekly Report Card

Last week was marked by low volume and a major lack of commitment on both sides of the market. Although there have not been any specific threats of another terrorist attack on the anniversary of September 11, there has been a lot of fear in the markets which resulted in a choppy week of trading. Our primary goal last week was just staying out of trouble rather than focusing on making huge profits. Remember that capital preservation should always be your number one goal, especially when there is a lack of direction in the markets. The profits will come, but only if you can first and foremost protect capital.

Here is a cumulative performance summary of the trades that were mentioned in The Wagner Daily for the past week of September 3 - September 6, 2002:

Number of trades targeted: 12

Number of trades triggered: 9

Number of closed winning trades and total gain: 5 trades, + 2.69 points

Number of closed losing trades and total loss: 4 trades, (1.59) points

Number of open positions and current gain/loss (based on closing prices): (none)

Odds and Ends

Check out the new additions to our web site during the past week:

Archive of Educational Articles. We have added a new sub-category to the Archives section of our web site that has links to all the educational articles we have written and published, including the recent articles on getting efficient ETF executions and using Fibonacci.

Cumulative Performance History. Also located in the Archives is a web page that reflects our cumulative track record of every trade recommended in past issues of The Wagner Daily.

I also want to share a cool web site with you that will allow you to track the strongest and weakest ETFs, real-time, on a graphical basis. It is called "ETF Heatmap" and is part of the Nasdaq's web site. You may want to keep the Heatmap in the background as you are trading each day because it gives a nice visual reference of what's hot and what's not. Check it out by going to: http://screening.nasdaq.com/heatmaps/Heatmap_ETF.asp.

As always, thanks for spreading the word about us!

Yours in success,

Deron M. Wagner

DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Weekly ( hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may buy, sell or have a position in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.