Since breaking out of a 12-year basing pattern in 2012, the Nasdaq has continued its ascent with nary a hiccup. Sure, it has had a pullback here and there, but every one has been shallow, short-lived and an eventual buying opportunity. While the tech-laden index remains a far cry from its Mount Everest-like peak formed during the final throes of the original Internet boom, it has come a long way from the lows plumbed in 2002.
What’s particularly interesting about the latest leg of the secular bull in tech land is that it has developed sans Apple (AAPL). Despite its epic fall from grace, Apple still remains the largest component of the Nasdaq, which means its price performance can still move the needle.
However, while Apple’s rise to $700 arguably dragged the Nasdaq along with it, the effect of its recent downturn hasn’t been nearly as potent. This is because a consortium of other tech stocks has bandied together to pick up the slack. Everyone from Microsoft (MSFT) and Cisco (CSCO) to Google (GOOG) and Amazon (AMZN) are charging to new all-time highs or at least challenging multi-year highs.
Meanwhile the semiconductor space — arguably one of the most important drivers of the technology sector — is making a comeback worth talking about. The recent resurrection of Intel (INTC) from the dustbin of suckitude — coupled with many key semi stocks like KLA-Tencor (KLAC) and Texas Instruments (TXN) testing decade-long resistance levels — is bringing renewed strength into this leading industry.
Click to Enlarge The accompanying chart of the Philadelphia Semiconductor Index (SOX) shows its recent break of a 10-year downtrend line. It appears the slumbering beast has finally awoken.
The price chart of TXN deftly captures the current appeal of most semiconductor stocks.
Click to Enlarge With the stock’s latest rally to the upper $30s, Texas Instruments appears poised to finally break out of its decade-long base. As the old saw goes, the longer the base, the higher in space. Stocks breaking out of multiyear bases are often pumped full of rocket fuel, which eventually propels them to dizzying heights. The spark that’s needed is a successful break above resistance — the upper end of the base.
This is actually a pattern that has played out time and again during the past year. Think of the torrid ascent in the Dow Jones Transportation Index (TRAN) when it finally cleared resistance at 5400 during the first week of 2013. Or the rapid rise of the staid old staples stock Johnson & Johnson (JNJ) when it finally cleared multiyear resistance at $72.50. Even Walmart (WMT) joined the space club when it broke out of a decade-long resistance zone at $63 in mid-2012.
While TXN could certainly use a cooldown in the short run — it’s up 10 of the past 11 trading sessions — its chart remains a thing of beauty. If you’re looking for bullish exposure to the chip space, here are a couple plays worth consideration for TXN — one aggressive and one conservative.
Aggressive
If you want to keep things simple and your potential profit unlimited, you could buy an October 37 call option for around $1.90 or better. The max risk is limited to the initial debit paid, and the max reward is unlimited.
Conservative
A more tempered approach would be entering the October 37-40 call spread by simultaneously buying the October 37 call and selling the October 40 call for a net debit of $1.30 or better. The premium received from the short October 40 call reduces the overall cost, and therefore risk, of the position. The max reward is limited to the distance between strikes minus the net debit, or $1.70, and will be captured if TXN can rise above $40 by October expiration.
Keep in mind TXN does report earnings on July 22, so there is some near-term risk surrounding the event.
As of this writing, Tyler Craig was long AAPL.
