With the S&P 500 lengthening its rebound to a fourth day on Wednesday, last week’s jitters appear to have been shaken off. While the large-cap-laden index has yet to rise to new bull-market highs — it remains 1% below the early April peak at 1597 — the strength of the current rally has healed much of the damage suffered from last week’s downdraft.
Despite ending the day with a classic doji candle, indicating short-term indecision, we saw some interesting rotation take place beneath the surface. While healthcare, biotech and consumer staples experienced some much needed profit-taking, other sectors like semiconductors received notable capital inflows.
Click to Enlarge For much of the year, the semis have flown under the radar, not really enticing many bulls or the bears to their ranks. Up until this week, they actually were underperforming the broader market as shown in the falling comparative relative strength line (CRS) in the accompanying chart.
The current rally in the Market Vectors Semiconductor ETF (NYSE:SMH) has been significant for two reasons. First, it has morphed the SMH from market laggard to market leader. And second, it has carried the SMH to a new multiyear high.
The top three holdings of SMH include Intel (NASDAQ:INTC), Taiwan Semiconductor (NYSE:TSM) and Texas Instruments (NASDAQ:TXN). Together, these three amigos comprise just under 40% of the entire fund. It shouldn’t be surprising, then, that the recent breakout in Intel is lifting the entire sector. In fact, Intel is in the midst of a powerful high-volume, seven-day winning streak. With the ongoing surge, the once-languishing chip stock is now back above its 200-day moving average for the first time since August 2012.
Click to Enlarge The risk-reward for new bullish plays on INTC at these levels isn’t all that appealing. So consider waiting to pull the trigger until after a pullback to the $22.50-$23 zone, which should provide support going forward.
With the stock still boasting a 3.8% dividend, buying shares and selling covered calls is a viable strategy. Given the cheap price tag of INTC shares, you won’t have to tie up an inordinate amount of capital buying the requisite 100 shares.
For traders already long shares of INTC, I would use the current rally as an opportunity to sell upside covered calls to partially hedge your recent gains.
At 47 cents, the June 24 calls offer a nice balance between scoring additional profits and acquiring downside protection. It allows you to participate in a further rise in INTC up to $24 while providing a buffer for up to a 2% drop in INTC shares.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.