The PHLX Semiconductor Sector Index (XSOX), one of the most widely followed gauges of semiconductor stocks, is faltering as highlighted by notable December and fourth-quarter declines. Some analysts see more downside to come for chip stocks.
Among the exchange traded funds poised to benefit from more weakness in chip stocks is the Direxion Daily Semiconductor Bear 3X ETF (NYSEArca: SOXS). SOXS is designed to deliver triple the daily inverse performance of the PHLX Semiconductor Sector Index. The bearish SOXS is up more than 9% this month.
“As Wall Street digests a post-earnings slide from Micron Technology (MU), other chip stocks are in focus, as well,” reports Schaeffer’s Investment Research. “This follows a note out of Morgan Stanley that urged investors to ‘stay cautious’ on the semiconductor industry, with the firm calling out weakness from almost all key markets, on top of valuations it still sees as too high.”
There are some risks to consider with semiconductor stocks and ETFs. For example, President Donald Trump has pushed for restrictions on trade barriers with China, which might pose a threat to the sector. China is a key market for the global semiconductor industry, consuming more than $100 billion worth of semiconductors or roughly one-third of the world population.
The Case For SOXS
“Looking at the specific names from the analyst note, Morgan Stanley said it was siding with Intel Corporation (NASDAQ:INTC) in the closely watched battle with rival Advanced Micro Devices, Inc. (NASDAQ:AMD),” notes Scheaffer’s. “ At the same time, the firm called attention to AMD’s computer processor product pipeline, and said a slowdown in the data center business could be a risk for INTC in 2019.”
Investors could be paying up for future catalysts for semiconductor and broader technology names. If there is a silver lining for the rising valuations on chip stocks it is that some industry observers believe the group’s valuations should not be measured in the traditional sense because of the evolution of the semiconductor business.
“Traders recently have been showing bearish tendencies toward NVIDIA Corp. (NASDAQ: NVDA). For instance, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows higher-than-normal put buying relative to call buying during the past two weeks, and short interest on Nvidia rose by 18.3% in the last reporting period,” according to Schaeffer’s.
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