Semiconductors underpin modern technology, with more than a thousand publicly traded companies contributing to the lightning-fast hardware used in devices, gadgets, and machinery. The sector strongly impacts broad averages but often trades against Standard and Poor's 500 Index (SP-500) and the Nasdaq-100 in divergent actions that highlight the semiconductor's unique position in the digital arena.
The PHLX Semiconductor Index (SOX) provides the sector’s most popular benchmark. It is a capitalization-weighted index that includes companies representing all phases in the assembly chain, from design and distribution to manufacture and sale. It came online in 1993, and now provides a snapshot of sector performance going back more than two decades.
SOX History and Outlook
The index peaked above 1300 in 2000 and collapsed in a bear market that bottomed out at 209 in 2002. An uptrend through the middle of the last decade failed to pierce the mid-point of the 1100-point decline, topping out at 560 in 2004 and failing breakout attempts in 2006 and 2007. The next downtrend broke its 2002 low, before coming to rest in 2009 at 167, just a few points above the all-time low at 138, posted in 1996.
A new uptrend began in 2009, with the index rocketing higher in two significant rally waves. The first ended in 2011, well below its 2004 high, giving way to a broad consolidation pattern that yielded a 2013 breakout. This second wave broke resistance at 560 and topped out at a 15-year high near 750 in June 2015, still below the midpoint of the massive 2000 to 2002 downtrend.
Sideways action in the second half of 2015 could last into 2016 and yield a fresh assault at new highs. This will mark a significant event for three reasons. First, it would establish the sector’s leadership in a more difficult market environment, driven by the Federal Reserve's tighter policies. Second, it would underpin broad averages due to the high number of publicly traded companies. Third, it would lift the index into a key test at the all-time high, posted in 2000.
A majority of major indices including the SP-500, Dow Industrial Average, and Nasdaq Composite, have traded to all-time highs since the bull market started in 2009. The Nasdaq-100 remained a notable exception, still trading below the April 2000 high at 4816. A 2016 semiconductor rally should remedy that shortfall, lifting the tech-heavy index to an all-time high above 5000.
The Intel Influence
Sector giant Intel (INTC), with the second highest SOX weighting, could provide the fuel needed for a 2016 rally. Dozens of smaller semiconductor companies are also connected to INTC in a supply chain driven by the company’s massive capital investments. As a result, strong performance in this single index component should have a positive synergistic effect throughout the industry.
The stock reached that resistance level at the start of 2015 and has spent the year grinding sideways. Long-term cycles are finally lining up, suggesting a 2016 breakout that could also trigger a SOX breakout. Conversely, the index will have a tough time gaining ground if INTC’s fortunes change and the stock enters a downtrend.
Traders and investors interested in sector exposure should watch both instruments closely in coming months, especially around key price levels. 37 to 40 marks INTC’s critical zone while 750 and 800 should determine SOX’s 2016 performance. Once those levels are cleared, breakout momentum could escalate, lifting INTC above 50 and the SOX above 900.
Top Sector Components
The following are top semiconductor stocks:
Name (Symbol)
|
Average Volume
|
Intel Corp (INTC)
|
26,200,000
|
Micron Technology Inc (MU)
|
24,400,000
|
Applied Materials Inc (AMAT)
|
14,200,000
|
Atmel (ATML)
|
10,300,000
|
NVIDIA Corporation (NVDA)
|
10,300,000
|
Taiwan Semiconductor Manufacturing Co Ltd (TSM)
|
9,430,000
|
Marvell Technology Group (MRVL)
|
9,210,000
|
Advanced Micro Devices (AMD)
|
8,910,000
|
Cypress Semiconductor Cp (CY)
|
8,370,000
|
Texas Instruments Inc (TXN)
|
7,980,000
|
The group can be played as a whole or with targeted exposure to leading companies. While leaders at all capitalization levels should follow the underlying uptrend, it makes sense choose the most popular and widely held issues. Market players looking for higher reward potential should also consider small and mid-cap companies because the capitalization segment between $500-million and $2-billion can provide a nearly endless supply of momentum and trend following plays.
Start the capitalization strategy by preparing a sector database and sorting the list by capitalization first and performance second. Locate the strongest uptrends by comparing current price to the 200-day EMA and converting that number to a percentage. Group leadership at the chosen capitalization level will naturally float to the top of the list when sorted using these criteria.
Semiconductor ETFs
The following are top semiconductor exchange top traded funds:
Name (Symbol)
|
Avg Vol
|
Market Vectors Semiconductor ETF (SMH)
|
3,884,000
|
iShares PHLX SOX Semiconductor Sector Index Fund (SOXX)
|
710,000
|
Direxion Daily Semiconductor Bull 3X Shares (SOXL)
|
621,000
|
SPDR S&P Semiconductor ETF (XSD)
|
196,000
|
Direxion Daily Semiconductor Bear 3X Shares (SOXS)
|
142,000
|
PowerShares Dynamic Semiconductors Portfolio (PSI)
|
22,000
|
ProShares Ultra Semiconductors (USD)
|
4,800
|
ProShares UltraShort Semiconductors (SSG)
|
3,400
|
Market Vectors Semiconductor ETF (SMH) offers the highest fund volume, which makes sense because it’s the oldest sector exchange traded fund. The newer iShares PHLX SOX Semiconductor Sector Index Fund (SOXX) provides competition, with a higher expense ratio, more assets and wider ranges in a typical market session. SMH carries a tighter bid/ask spread, which supports price-sensitive strategies while SOXX’s wider spread works well with higher risk momentum strategies.
Aggressive market players can build leverage with Direxion Daily Semiconductor Bull 3X Shares (SOXL) and Daily Semiconductor Bear 3X Shares (SOXS), balancing the greater exposure with higher costs. While these hyperbolic securities are designed to yield three times the movement of a typical sector index, returns can vary greatly due to periodic resets, often generating intraday price action that diverges sharply from a non-leveraged ETF.
The Bottom Line
The semiconductor sector may be on the verge of a breakout that provides market leadership in 2016. Watch key price levels on PHLX Semiconductor Index for early buying signals, while also keeping an eye on sector giant Intel (INTC), which has the power to move many sector components due to its vast supply chain.
By Alan Farley
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