Anchors Aweigh

  • December 20, 2000
  • Loren Fleckenstein

The Internets took the brunt of
Wednesday’s sell-off among the tradable funds while the defensives tread
water. 

The B2B Internet HOLDR SPDR
(
XLU |
Quote |
Chart |
News |
PowerRating)
plunged 19.0%, the day’s severest loss among the exchange-traded
funds.

Among the HOLDR’s components, Commerce
One
(
CMRC |
Quote |
Chart |
News |
PowerRating) tumbled 26.8% after losing a potential customer to
rival VerticalNet
(
VERT |
Quote |
Chart |
News |
PowerRating). The latter held its loss for the day to 1.2%.
Arbia
(
ARBA |
Quote |
Chart |
News |
PowerRating) dived 20.3%, Agile Software
(
AGIL |
Quote |
Chart |
News |
PowerRating) 20.8%, FreeMarkets
(
FMKT |
Quote |
Chart |
News |
PowerRating)
13.8%, CheckFree
(
CKFR |
Quote |
Chart |
News |
PowerRating) 11.0%.

The Dow Jones Internet iShares
(
IYV |
Quote |
Chart |
News |
PowerRating)
fell 17.4%, the Internet Infrastructure HOLDR
(
IIH |
Quote |
Chart |
News |
PowerRating) 15.2%, the Broadband
HOLDR
(
BDH |
Quote |
Chart |
News |
PowerRating) 8.6%, the Internet Architecture HOLDR
(
IAH |
Quote |
Chart |
News |
PowerRating) 7.9%, the
Internet HOLDR
(
HHH |
Quote |
Chart |
News |
PowerRating) 7.8%, the Technology SPDR
(
XLK |
Quote |
Chart |
News |
PowerRating) 7.6%.

If there’s a silver lining for traders
looking for long trades and a market bottom, it was in the volume that
accompanied the severe price declines. The Nasdaq Composite fell 7.1% while
volume rose 20% to 2.788 billion shares. That’s the kind of action that can
clear out the weak holders and put in a bottom. But as I point out in my href=”/.site/stocks/commentary/lfatshow/12192000-10925.cfm”>Trading
The News commentary, I won’t give much credibility to the idea of a
bottom until we see (1) sustained bullish tape action, and (2) a multiplication
of high relative strength stocks completing sound bases.

I also don’t like the fact that
bearishness, as indicated on the psychological indicators, has not reached the
extreme levels that in the past has coincided with bottoms. The following chart
compares the Naz with put/call volume across all four exchanges: Chicago, Amex,
Philadelphia, and Pacific.

 

Exchange-traded funds combine traits
of stocks and mutual funds. Like mutual funds, an ETF represents diversified
ownership in a number of different stocks, reducing company-specific
risk. Like stocks, ETFs trade on exchanges, nearly all of them, in fact, trade on
the American Stock Exchange. They quote throughout the day, enabling
traders to take advantage of intraday price moves.

If you’re new to exchange-traded funds,
be sure to visit TradingMarkets’ Knowledge Center,
dedicated to explaining the basics of trading and active investing in ETFs and
mutual funds. Just click on the Funds tab
near the top of this page, then click on the Knowledge
Center tab. 

You also will find lessons on trading
exchange-traded funds in the Stocks Education area of TradingMarkets.com. In
particular, check out my three-part series on trading ETFs, starting with href=”/.site/stocks/education/strategies/05262000-6129.cfm”>Moving
Average Crossovers. I also recommend newcomers read my tutorial, href=”/.site/stocks/education/strategies/06272000-6815.cfm”>Trading
HOLDRs: Unique Opportunity And Risk.

All stocks and exchange-traded funds
are risky. In any new trade, reduce your risk by limiting your position size and
setting a protective price stop where you will sell your new buy or cover your
short in case the market turns against you. For an introduction to combining
price stops with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
you’ll find extensive lessons in the Money
Management area of TradingMarkets’ Stocks Education section.