Nortel Sell-Off Lifts Defensives

Cash headed for the defensive stocks Wednesday, buoying exchange-traded funds focused on consumer staples and pharmaceutical shares. The Broadband HOLDR led tech funds lower after Nortel Networks disappointed.

The Broadband HOLDR (BDH | Quote | Chart | News | PowerRating) plunged 18.2%, the day's heaviest loss among the 76 exchange-traded funds tracked by the TradingMarkets FundScanner. 

The Broadband HOLDR's biggest component--Nortel Networks (NT | Quote | Chart | News | PowerRating), with a 20.7% weighting--shed 29.1% after reporting Q3 fiber-optic sales declined from the second quarter. All the Broadband HOLDR's 20 component stocks fell with violent declines in fiber-optics providers. JDS Uniphase (JDSU | Quote | Chart | News | PowerRating), down 25.3%, and Ciena (CIEN | Quote | Chart | News | PowerRating) 20.0%.

The Semiconductor HOLDR (SMH | Quote | Chart | News | PowerRating) followed through on Tuesday's decline, extending its losses 7.8%.

The Internet Architecture HOLDR (IAH | Quote | Chart | News | PowerRating) slid 7.9%, the B2B HOLDR (BHH | Quote | Chart | News | PowerRating) 6.9%, the Technology SPDR (XLK | Quote | Chart | News | PowerRating) 6.5%, the Dow Jones Technology iShares (IYW | Quote | Chart | News | PowerRating) 6.4%, the Internet Infrastructure HOLDR (IIH | Quote | Chart | News | PowerRating) 6.1%.

While we're talking Internets, much ado was made over the rally in Amazon.com (AMZN | Quote | Chart | News | PowerRating) after the e-tailer reported a smaller-than-expected loss. To my eye, Amazon came under distribution within the rally. For my chart analysis of Amazon, see my Trading The News commentary.

The broad index shares headed south as well, the Qubes (QQQ | Quote | Chart | News | PowerRating) forfeiting 5.5%, the Spyders (SPY | Quote | Chart | News | PowerRating) 2.4%, the Diamonds (DIA | Quote | Chart | News | PowerRating) 0.5%.

On the upside, the Pharmaceutical HOLDR (PPH | Quote | Chart | News | PowerRating) gained 2.6%, the sharpest gain among the exchange-traded funds. The Consumer Staples SPDR (XLP | Quote | Chart | News | PowerRating) rose 2.3%, the Dow Jones Healthcare iShares (IYH | Quote | Chart | News | PowerRating) 2.3%, the Dow Jones Consumer Non-Cyclical iShares (IYK | Quote | Chart | News | PowerRating) 1.2%.

Intermediate-term traders who have grown used playing the breakout game in high relative strength tech stocks should take note of the obvious strength in the defensive area. Among the exchange-traded funds, healthcare, utility, and consumer staples ETFs lead their peers in terms of three-month relative strength. This shows up clearly in TradingMarkets' indicator list for the strongest ETFs by three-month RS. As of Thursday's close, the top-performing tradable funds for the past three months were the Pharmaceutical HOLDR (3-month RS 98), Consumer Staples SPDR (RS 97), Dow Jones Healthcare iShares (RS 94), Utilities SPDR (RS 94), Utility HOLDR (RS 83). The FundScanner RS scores include several thousand mutual funds as well as the ETFs.

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 Moving Average Crossovers. I also recommend newcomers read my tutorial, 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.