Don’t say we didn’t warn you, but semiconductor stocks are due for a very steep and scary correction. The evidence is simply overwhelming: year to date, the Market Vectors Semiconductor ETF (SMH) — the most popular exchange-traded fund tracking the performance of semiconductor stocks by volume — is down nearly 3%. Although this isn’t the most precipitous rate of decline we’ve seen in the markets, the same YTD metric for 2014 yielded positive returns of 32%, representing a dramatic shift in investor sentiment for semiconductor stocks.
The semiconductor ETF also happens to have a statistically strong correlation — 0.89, for the math wizards out there — with the benchmark S&P 500 index, and that’s not a good thing! Analyzing annual returns derived from monthly average performances, both the SMH fund and the S&P index are sharply down from their annual returns produced over the past two years. Furthermore, both have failed to return the same type of performance-magnitude exhibited in 2009. For semiconductor stocks in general, it isn’t even close.
If history is any indication, the industry faces an imminent drop from its relatively lofty position. Here are three semiconductor stocks about which investors should be most concerned.
Semiconductor Stocks Short-Circuiting the Markets: Texas Instruments Inc.
On the surface, Texas Instruments (TXN) appears to be pioneering exciting developments in the semiconductor industry with the release of one of its latest products, a radio frequency synthesizer called the LMX2571. According to Zacks Equity Research, the LMX2571 is the most power-efficient variant, and one that is designed to increase the efficiency of high-tech digital applications. Perhaps spurred by the fundamentally bullish news, TheStreet followed up the announcement with a buy recommendation.
However, the markets quickly turned bearish for TXN stock in the last few days of June, and for the current month, the technical charts have been awash in red ink. The problem has been exacerbated by TXN stock options trading, with buying pressure for puts — essentially, a gamble that TXN stock will decline in value — spiking up volume in greater magnitude than usual.
Based on the rapid collapse in the markets, many traders believe that TXN stock is due for even more pain. They may be proven correct. Following what has been 12 days of losses — save for July 1st and 2nd, which provided the only brief respite — the bulls only offered a meager 1.87% response on July 10. This formed an “inside day” pattern where the entire trading range for a session was inside that of the prior session. It suggests shell shock on the part of TXN stock investors, and in cases like this, it’s best to move out of the way.
TXN stock has had a brilliant run up in the markets since the onset of the Great Recession. Unfortunately, that light is flickering fast.
Semiconductor Stocks Short-Circuiting the Markets: Qualcomm, Inc.
San Diego-based technology firm Qualcomm (QCOM) is riding on a fundamentally mixed prognosis compared to many other semiconductor stocks. Demand for premium Android-powered smartphones has been declining, which recently caused investment bank Canaccord Genuity to lower its forecast for QCOM stock to $77, a nearly 4% drop from its earlier $80 target.
In spite of the forecast slash and the bearish developments that precipitated it, Canaccord reaffirmed its buy rating on QCOM stock. It is not alone, either. Because Qualcomm provides chips and technological solutions for several Apple (AAPL) products, many analysts believe that QCOM stock will benefit from the Internet of Things revolution, or the prediction that widespread digital interconnectivity will occur by the year 2020.
That’s certainly cause for optimism, but what about the here and now? When it comes to the actual markets, QCOM stock has unambiguously been a poor investment since the summer of 2014, kick-dropping down in sickening fashion. Year to date, QCOM stock is underperforming to the tune of -16%, and the technical evidence shows no sign of ameliorating. Since gapping down on June 29, QCOM stock has been trading hands inside a bearishly trending consolidation pattern, which is a huge red flag.
QCOM stock may indeed have a brighter long-term outlook than other semiconductor stocks, but for right now, there’s no compelling reason to buy this company.
Semiconductor Stocks Short-Circuiting the Markets: STMicroelectronics NV
Arguably the lesser-known among the semiconductor stocks featured in this article, Swiss-headquartered STMicroelectronics NV (STM) nevertheless happens to be the best-performing on a year-to-date basis, up 7.4%. The positive figure is even more impressive, considering that against a peak-to-trough framework, STM stock lost nearly 22% of its market value between April and May of this year.
So, why should STM stock investors be concerned? The answer lies in the company’s choppiness in the markets. Since January 2014, the difference in magnitude between the closing high and low for STM stock is 48.2%, edging out the equally volatile TXN stock, which came in at 47%.
In addition, the last year and a half for STM stock has been characterized by a series of head-and-shoulder patterns, taking traders to the pinnacle of investment success, but just as quickly dumping them into the cesspool of despair should they fail to jump ship in time. This undulating dynamic makes it extraordinarily difficult to make sense of STM stock, rendering the company more of a gamble than a legitimate investment.
Combined with the overall poor performance of semiconductor stocks, the volatility of STM stock should be enough to lead most people away.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
