Gleaning Market Insight From Semiconductor ETFs | ETF Trends

As cyclical group with deep ties to marquee foreign markets, China chief among them, semiconductor stocks can be important tells of broader market direction.

Risk-tolerant traders can capture some of those opportunities with leveraged ETFs, such as the Direxion Daily Semiconductor Bull 3X ETF (NYSEArca: SOXL).

The Direxion Daily Semiconductor Bull 3X ETF seeks daily investment results, before fees and expenses, of 300% of the daily performance of the PHLX Semiconductor Sector Index. The fund, under normal circumstances, invests at least 80% of its net assets in financial instruments, such as swap agreements, and securities of the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The index measures the performance of domestic companies engaged in the design, distribution, manufacture, and sale of semiconductors.

U.S. markets have reeled in response to growing fears over the coronavirus contagion that could soon be declared a pandemic, or widespread outbreak across a whole country or the world. Consequently, many investors have taken the opportunity to trim gains after a multi-year run that has pushed U.S. markets to record high levels. With the markets being priced to perfection after strong earnings reports and stable economic growth, the sudden black swan event from a widespread contagion has triggered a precipitous sell-off.

Sizing up SOXL

There could be some evidence pointing to semiconductor stocks and ETFs being a leadership group when the coronavirus issue is resolved.

“But the more obvious contributing factor here has to do with where the industry is in the market cycle. Chip watchers know that semiconductor sales have been in a secular decline since 2018, and some analysts are predicting the sales decline to get even worse. The fact that a slew of semiconductors reported earnings and revenue for last quarter above analyst expectations has done little to quell concerns,” said Direxion in a recent note.

As an industry, semiconductor makers are highly tied to global growth, estimates for which are being ratcheted lower due to the coronavirus. However, many of those trimmed estimates pertain to the first half of this year and if there is pent up demand seeping into the third and fourth quarters.

“Ultimately, the industry is at an inflection point. The rollout of 5G should provide some optimism, but the headwinds facing semiconductor companies should continue to dampen enthusiasm for what some have called ‘the industry of the decade,’” according to Direxion.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.