Being a Bear in Semiconductors Is Paying Off This Year

Semiconductors were one of the hot sectors coming out of the pandemic as an ensuing chip shortage also boosted demand while supplies were low, particularly in the automotive industry. Given that, however, the Direxion Daily Semiconductor Bear 3X Shares (SOXS) is up close to 60% this year.

It can be a confounding notion when the forces of supply and demand should be furthering the case for the semiconductor industry. But as investors are finding out this year, being a bear has been a more profitable bet, especially when it comes to the technology sector in general.

Therein lies the issue for semiconductors — being dragged down by the broader weakness in the technology sector. Inflation fears have upended the tech sector with the Nasdaq-100 down over 30% halfway through 2022 and the S&P Semiconductors Select Industry Index doing worse, being down about 37% year-to-date.

Bullish Forces Still in Play

Despite the weakness, there are still bullish factors in play for semiconductors. The forces of supply and demand are still weighing on the sector, which could continue to push revenue higher.

“During the earliest days of the COVID-19 crisis, automotive headlines focused on the huge drop in vehicle demand,” a McKinsey article said. “But for more than a year now, concerns have shifted to the supply side. Although vehicle orders have surged to unexpected heights, a shortage of automotive semiconductors is forcing OEMs to close production lines or remove some popular features, such as heated seats, from their offerings.”

According to the Semiconductor Industry Association (SIA), revenue jumped 23% versus last year. It’s just a reminder that no matter how bad the stock market gets, the fundamentals are still in play for semiconductors as the world continues to lean heavily on technology and will do so for the foreseeable future.

“More than two years into the pandemic, the gap between chip supply and demand has widened across all semiconductor-enabled products,” the article added further. “While sales of all consumer goods plummeted in the first half of 2020, and automotive sales dropped precipitously—up to 80 percent in some locations—demand rebounded more than expected later in the year, continued to grow in 2021, and remains strong today.”

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