Bucket 2 Trade Idea: SMH

Into year-end it quite honestly is a difficult call in any asset class.  Immediate term risk assets are much oversold and the bounce we are seeing today may have further to go.  Soon the question will become whether this bounce leads to performance chasing (and hence a rally) in risk assets by fund managers or whether the global growth slowdown and European debt issue will weigh more.

Overall I would much prefer a trade idea where we sell options (vol is high).  In that case I would like to sell far out of the money calls or call spreads on the SMH etf (semiconductor stocks).  Why?  The group often acts as a leading indicator to global equities and its recent sell-off along with the market started at the resistance point at its 200 day simple moving average.  If global growth is to slow then semiconductor investing should also cool somewhat..charts like copper and the inverted yield curves all over the world are also confirming slowing growth.  On a weekly chart the SMH along with the SOX is developing a major two year long head and shoulders pattern which if it works out would have a final price target near the 2008 lows. 

So, in order to enter the trade we’d need to see the SMH up somewhere between $30 or $31, and we would then want to sell calls at least two months out (February or May) and about 5-10% out of the money.  Alternatively, and especially if the SMH gets to between $31 and $33 we would also be happy to buy puts as volatility would have come down.  We would then buy May at the money puts.

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