Semiconductor stocks, some of the worst off assets in the recent selling, have staged a strong comeback, with sector-related exchange traded funds now testing their short-term trend lines.
Rich Ross, managing director and head of technical analysis at Evercore ISI, argues that semiconductors tend to trade in tandem with the S&P 500 and act as a proxy for the health of the overall economy, reports Amanda Diaz for CNBC.
“They are the lifeblood of a world increasingly driven by technology,” Ross said on CNBC. “Metaphorically speaking, when the semis sneeze, the market catches a cold and vice versa.”
The semiconductor sector has made a strong rebound over the past few weeks. The iShares PHLX Semiconductor ETF (NasdaqGM: SOXX), which tracks the PHLX SOX Semiconductor Sector Index, gained 11.9% since the August 25 low. Similarly, the Market Vectors Semiconductor ETF (NYSEArca: SMH) rose 12.3%, SPDR S&P Semiconductor ETF (NYSEArca: XSD) increased 10.1% and PowerShares Dynamic Semiconductors Portfolio (NYSEArca: PSI) advanced 8.6%. The semiconductor ETFs have been coming up against their 50-day simple moving averages.
The PHLX Semiconductor Index was “beaten up more than any group in the recent correction,” Ross added. “But more importantly, it’s rallied 14% from the low outperforming the S&P 500 during the period. That relative strength off the low is a nice indicator of future success.”
The PHLX Semiconductor Index was slightly up 0.1% Wednesday, hovering around 625.5. Given the recent momentum, Ross is optimistic about the sector’s outlook.
“A break above that 50-day moving average could bring us as high as that 150-day moving average near $680,” Ross said, adding that the longer-term moving average has served as support for the past two years. “That reinforces its importance.”
For more aggressive traders who are watching for a potential break out, the Direxion Daily Semiconductors Bull 3x Shares (NYSEArca: SOXL) takes the 3x or 300% long daily performance of the PHLX Semiconductor Sector Index while the ProShares Ultra Semiconductors (NYSEArca: USD) reflects the 2x or 200% daily performance of the Dow Jones U.S. Semiconductors Index.
iShares PHLX Semiconductor ETF
For more information on the semiconductors sector, visit our semiconductors category.
Max Chen contributed to this article.