Recent ChangeWave Research data show continued bullishness in the semiconductor industry in 2010 based on sales and forecasts. Historically, in these surveys and in the real world, the semi space has led the overall IT sector, and IT spending and growth has led the overall economy.
Therefore, a simple analysis would say, “go long semis.” But a larger question remains: What has the market already priced in based on its assumptions about semis, the IT sector and the economy for the rest of the year?
The market is currently being driven by near 0% interest rates and what is known as the “U.S. dollar carry trade” — i.e., borrow dollars cheap and invest them in equities, and when the dollar goes up, run and sell equities to meet margin calls. This has mitigated the value of the market as a leading economic indicator when, historically, markets forecast economic behavior and corporate profits six months out, and sometimes more.
This makes the current chart for the Semiconductor HOLDRs (SMH) — the index for semi stocks — all the more confusing. The index hit a 52-week high of $28.72 in early January, tried to reclaim that high a few days ago, and is now sliding again.
Is this telling us something, or is it simply the result of very short-term trading and profit-taking?
3 Possible Takes on the Semiconductor Space
One view is that the SMH peaked about six months before the beginning of Q3, and that is the quarter the Street expects real economic and revenue growth to take hold.
This would lead us to believe that the Street is truly uncertain about economic behavior and corporate profits in the second half of the year, but their expectations mirror the bullishness found in the ChangeWave surveys.
A second view is that SMH’s chart is all noise.
Trading in this sector generally follows the dollar and the Nasdaq (NASD). A quick look at the charts of the Nasdaq versus the SMH shows a parallel move for almost a year that begins to diverge a few weeks ago, with SMH headed down and the Nasdaq breaking out to the upside. This rarely happens, and to many traders it means this is either a temporary downturn for SMH or a temporary upturn for the Nasdaq.
I have a third view: History, patterns and charts do not matter.
We are coming off the biggest financial crash since the Great Depression; the worst stock market fall since the Great Depression; the sharpest recession since the Great Depression; and we have the lowest interest rates possible. Trying to use history to predict current trading is illogical.
How to Invest in Semi Stocks
What you need to do is be a great stock picker. Invest in individual semi companies riding trends, and do so with a very long-term view and long-term trading strategies.
Stock picking means reading Wall Street and building positions around the irrationality of short-term traders. For example, SanDisk (SNDK) had great earnings a few weeks back, but the stock blew up as short-term traders took profits and ran.
Bottom line: The indices aren’t going to behave as they did in the past, at least not in the short term. So, when you look at individual names such as SanDisk or Intel (INTC), you’re best bet is to buy LEAPs. There are January 2012 calls available for the SMH and for many big names in the semi space.
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