Two ETFs to Play Volatility in Semiconductor Earnings Season

A chip shortage has been an obvious factor in the performance of semiconductor stocks, but as the global supply eventually catches up to demand, it could be a volatile earnings season for the sector.

That said, exchange traded fund (ETF) traders will want to make sure that the Direxion Daily Semiconductor Bull 3X ETF (SOXL) and the Direxion Daily Semiconductor Bear 3X Shares (SOXS) are a part of their arsenal when earnings reports are released. Both seek 300% of the daily performance of the PHLX Semiconductor Sector Index.

Looking at both year-to-date charts, the semiconductor shortage has obviously benefited SOXS this year with a 32% gain. SOXS can thank supply chain issues disrupting the ability to meet the global demand for semiconductors, which have been affecting a number of industries, including the automotive industry.

Additionally, factory shutdowns in Asia are hampering semiconductor production. Add power outages in China to the mix, and it adds another layer of volatility ahead for semiconductor earnings.

“Add in a potential China slowdown and rising fears around double-ordering, and we believe that this earnings season will be highly volatile,” said Evercore ISI analyst C.J. Muse. “So, likely a choppy road ahead with little conviction one way or the other.”

SOXL Chart

More Recent Momentum for Bears

While the YTD chart belongs to the bulls, the more recent one-month chart gives the victory to the bears. SOXS is up 10% over the last four weeks as traders could be betting on a less-than-stellar showing for semiconductor stocks.

That momentum could be short-lived if the earnings of Taiwan Semiconductor is any indication of what’s ahead for the sector. The company beat its expectations as it “earned $1.08 per U.S. share in the September quarter, up 17% from the year-earlier period,” according to an Investor’s Business Daily article.

“Analysts expected earnings of $1.04 a share, according to FactSet,” the article added. “The company’s sales increased 23% to $14.88 billion.”

“Our third quarter business was mainly supported by strong demand across all four growth platforms, which are smartphone, HPC, IoT and Automotive-related applications,” said Wendell Huang, VP and chief financial officer of TSMC. “Moving into fourth quarter 2021, we expect our business to be supported by strong demand for our industry-leading 5nm technology.”

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