The truth behind trading semiconductor (chip) stocks (INTC, TXN)

Semiconductor companies provide a large number of highly liquid securities and encourage risk-taking in all time frames, from intraday scalping to monthly market timing. The industry also supports various profit strategies, including momentum trading, basket allocation and short selling. It operates independently in many market stages, taking its own path while major indexes push up or down. Even under difficult macro conditions, this different behavior will bring additional opportunities. There are many ways to trade in the semiconductor sector, from identifying specific stocks to using exchange-traded funds (ETFs) to invest in the entire industry.

Currency exchange rates (forex) affect the performance of a wide range of industries, with only two of the top five highest market capitalizations in the United States: Intel (INTC) and Texas Instruments (TXN). In addition, the strong U.S. dollar has weakened chip makers with major overseas operations because their product prices have declined. This is especially true in mature sub-sectors with low profit margins, such as memory chips and electronic products for audio components. The specter of China’s export tariffs on the United States has also raised concerns among semiconductor investors, because certain parts or assembly processes are carried out overseas.

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Find the best chip deal

Top semiconductor stocks

Name (symbol)

Market value in the third quarter of 2018

(Billions of U.S. dollars)

Intel Corporation (INTC)

207.70

Nvidia Corporation (NVDA)

145.87

Texas Instruments (TXN)

97.48

Advanced Micro Devices (AMD)

25.87

Applied Materials Corporation (AMAT)

33.16

Marvell Technology Group (MRVL)

12.09

Cypress Semiconductor Cp (CY)

4.88

Micron Technology Corporation (MU)

3.68

Stocks of all market capitalization levels can provide good trading opportunities, but most market participants insist on using the most popular stocks and compare these issues with the performance of the leading or lagging Nasdaq 100 index. US semiconductor blue chip companies have a greater impact on the index than the S&P 500 index because they are dual-listed. When stock performance deviates significantly from index performance, these cross-market linkages also support various opposite strategies.

Small and medium-sized semiconductors generate a steady stream of momentum and trends when they follow the game, because they usually show the highest growth potential. Finding these popular games requires a database sorted first by capitalization and then by performance, looking for the strongest upward trend in the technical strategy and the fastest revenue growth in the basic strategy. The capitalization area of ​​US$500 million to US$2 billion provides an optimal choice for start-up companies that have not yet attracted widespread public interest, making it an excellent focus for weekend learning and preparation.

The truth behind trading semiconductor chip stocks

Semiconductor ETF

2018 top semiconductor exchange traded funds (ETF)

Name (symbol)

Average volume

iShares PHLX SOX Semiconductor Industry Index Fund (SOXX)

449,300

Market Vectors Semiconductor ETF (SMH)

1,280,000

SPDR Standard & Poor’s Semiconductor ETF (XSD)

31,000

Direxion Daily Semiconductor Bull 3X Shares (SOXL)

85,000

PowerShares Dynamic Semiconductor Product Portfolio (PSI)

4,100

ProShares Ultra Semiconductors (USD)

6,250

Direxion Daily Semiconductor holds 3 times the stock (SOXS)

73,600

ProShares Ultra Short Semiconductor (SSG)

38,000

The Market Vectors Semiconductor ETF (SMH) attracts the most trading volume because it is the oldest industry exchange traded fund, and the newer iShares PHLX SOX Semiconductor Industry Index Fund (SOXX) provides direct competition. Compared with SMH, SOXX has a higher expense ratio, holds more assets, and tends to cover a larger percentage in a typical trading day. SMH trades with narrower bid-ask spreads, which helps price-sensitive volatility trading strategies, while SOXX’s wider spreads support higher-risk momentum trading strategies. Compared with its peers, SMH also has the largest open interest among its listed options.

Direxion Daily Semiconductor Bull 3X Shares (SOXL) and Daily Semiconductor Bear 3X Shares (SOXS) provide aggressive participants with higher industry leverage, while increasing risk and higher costs. The yield of these securities is three times that of typical industry indexes. This applies to multi-day bets, but due to the regular calculation of relative value, intra-day returns may vary greatly, which usually results in chaotic late-market price movements that deviate sharply from non-leveraged industry ETFs.

ETF transaction example

The following is a historical example of the iShares PHLX SOX Semiconductor Industry Index Fund (SOXX) from the end of 2008 to 2009. As shown in the above chart, the SOXX stock price broke through the September high (blue line) in November and hit a record high. The December time high was 96.03. It sold in a bullish flag pattern (red line) in February, testing the breakout level and the support of the 50-day moving average. The Nasdaq 100 index took off on February 10 (black arrow)-in response to positive overseas news-rose more than 1.3%. This outperformed the S&P 500 Index and other large-cap stock indexes. Semiconductors supported the rally of technology stocks, SOXX rose by more than 3%, broke the flag pattern and triggered a major buy signal.

Bottom line

Chip stocks are the largest basket of technology companies listed on the US exchange. The main differences between the sub-components provide endless trading and investment opportunities through different market conditions. Semiconductor ETFs also provide a good way to gain exposure to the industry.

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