The Truth Behind Trading Semiconductor (Chip) Stocks (INTC, TXN)

Semiconductor companies offer a lot of highly liquid securities that encourage risk-taking in all time frames, from intraday scalping to monthly market timing. The sector also supports various profit strategies, including momentum trading, basket allocations and short selling. It acts independently in many market phases, going its own way while major indices push higher or lower. This divergent behavior brings additional opportunities, even in difficult macro conditions. There are many ways to trade the semiconductor space, from identifying particular stocks to investing in the sector as a whole using exchange-traded funds (ETFs).

Currency exchange rates (forex) impact broad sector performance, with just two of the top five highest capitalized components based in the United States: Intel (INTC) and Texas Instruments (TXN). In addition, a strong U.S. dollar undermines chip makers with major overseas operations because their products become less competitively priced. This is especially true in mature sub-sectors that post lower profit margins, like memory chips and electronics used in audio parts. The specter of tariffs on Chinese exports to the United States also is of concern to investors in semiconductors where certain parts or assembly processes take place overseas.

Finding the Best Chip Trade

TOP SEMICONDUCTOR STOCKS

Stocks at all market capitalization levels can offer good trading opportunities but most market players stick with the most popular names, playing those issues against leading or lagging Nasdaq 100 performance. American semiconductor blue-chip companies impact that index to a greater degree than the S&P 500, where they share dual listings. These cross-market connections also support a variety of contrary strategies when stock performance diverges sharply from index performance.

Mid and small-cap semiconductors generate a steady stream of momentum and trend following plays because they usually show the highest growth potential. Finding these hot plays requires a database that sorts first by capitalization and then by performance, looking for the strongest uptrends in technical strategies and fastest revenue growth in fundamental strategies. The $500 million to $2 billion capitalization zone offers a sweet spot for emerging companies that have yet to attract broad public interest, making it an excellent focus for weekend study and preparation.

Semiconductor ETFs

TOP SEMICONDUCTOR EXCHANGE TRADED FUNDS (ETFs) FOR 2018

Market Vectors Semiconductor ETF (SMH) attracts the most volume because it’s the oldest sector exchange-traded fund, with the newer iShares PHLX SOX Semiconductor Sector Index Fund (SOXX) providing direct competition. SOXX has a higher expense ratio, holds more assets and tends to cover a greater percentage ground in a typical trading day than SMH. SMH trades with a tighter bid-ask spread, assisting price sensitive swing trading strategies, while SOXX’s wider spread supports higher risk momentum trading strategies. SMH also has the largest open interest in its listed options compared to its peers.

Direxion Daily Semiconductor Bull 3X Shares (SOXL) and Daily Semiconductor Bear 3X Shares (SOXS) offer aggressive players much higher sector leverage, balanced with added risk and higher costs. These securities are designed to yield three times the movement of a typical sector index. This works well with multiday bets but intraday returns can vary greatly due to a periodic calculation of relative value, often generating chaotic late day price action that diverges sharply from a non-leveraged sector ETF.

An ETF Trading Example

Here is a historical example of the iShares PHLX SOX Semiconductor Sector Index Fund (SOXX) from the end of 2008 into 2009. As the chart above shows, SOXX shares broke out above the September high (blue line) in November and hit an all-time high at 96.03 in December. It sold off in a bull flag pattern (red lines) into February, testing support at the breakout level and 50-day EMA. The Nasdaq 100 took off on February 10 (black arrow)—in reaction to the positive overseas news—and rose more than 1.3%. That outperformed the S&P 500 and other large-cap indices. Semiconductors underpin that tech rally, with SOXX rising more than 3%, breaking out of the flag pattern and triggering a major buy signal. 

The Bottom Line

Chip stocks provide the biggest basket of technology companies listed on US exchanges. Major variations between sub-components offer an endless variety of trading and investment opportunities through divergent market conditions. Semiconductor ETFs also provide a good way to gain exposure to the sector.

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