When You Trade Semiconductor (Chip) Stocks, You Need to Know This

Semiconductor companies have a lot of securities that are very easy to buy and sell, which makes it easy to take risks in all kinds of time frames, from short-term scalping to long-term market timing. The sector also allows for a variety of ways to make money, like momentum trading, basket allocations, and short selling. It acts on its own in many market situations, even when the main indices are going up or down. Even in bad macroeconomic situations, this kind of behaviour can lead to new opportunities. There are a lot of ways to trade the semiconductor space, from finding specific stocks to investing in the sector as a whole through ETFs (ETFs).

There are a lot of things that happen with currency exchange rates, but only two of the top five most valuable components are in the United States: Intel (INTC) and Texas Instruments (TI) (TXN).

In addition, a strong U.S. dollar hurts chip makers that have a lot of business in other countries because their products become less competitively priced. This is especially true for well-established sub-sectors that make less money, like memory chips and electronics used in audio parts. There is also the threat of tariffs on Chinese exports to the United States that investors in semiconductors should be worried about. Some parts or assembly processes may be done outside of the United States.


Finding the Best Chip Trade


Name (Symbol)    Q3 2018 Market Cap
($ billions)
Intel Corp (INTC) 207.70
NVIDIA Corporation (NVDA) 145.87
Texas Instruments Inc (TXN) 97.48
Advanced Micro Devices (AMD) 25.87
Applied Materials Inc (AMAT) 33.16
Marvell Technology Group (MRVL) 12.09
Micron Technology Inc (MU) 3.68

Stocks of all sizes can offer good trading opportunities, but most people stick with the most popular names and play them against the performance of the Nasdaq 100. Companies that make semiconductors in the U.S. have a bigger impact on that index than the S&P 500, where they have two shares. These cross-market connections also allow for a lot of different strategies when stock performance is very different from the index performance.

So many momentum and trend-following plays come from mid and small-cap semiconductors because they usually have the best growth prospects. A database that sorts first by capitalization and then by performance is needed to find these hot plays. The database looks for the strongest uptrends in technical strategies and the fastest revenue growth in fundamental strategies. The $500 million to $2 billion capitalization zone is a good place for new businesses that haven’t yet gotten a lot of attention from the public. This is a good place to spend the weekend studying and preparing.

The Truth Behind Trading Semiconductor Chip Stocks


Semiconductor ETFs


Name(Symbol)             Avg Volume
iShares PHLX SOX Semiconductor Sector Index Fund (SOXX)  449,300
Market Vectors Semiconductor ETF (SMH)  1,280,000
SPDR S&P Semiconductor ETF (XSD)  31,000
Direxion Daily Semiconductor Bull 3X Shares (SOXL) 85,000
Invesco Dynamic Semiconductors Portfolio (PSI)  4,100
ProShares Ultra Semiconductors (USD)  6,250
Direxion Daily Semiconductor Bear 3X Shares (SOXS)  73,600
ProShares UltraShort Semiconductors (SSG)  38,000

Market Vectors Semiconductor ETF (SMH) is the most popular because it’s the oldest exchange-traded fund in the sector. The newer iShares PHLX SOX Semiconductor Sector Index Fund (SOXX) is right next to it. In general, SOXX has a higher expense ratio than SMH, holds more assets, and tends to cover more ground in a typical trading day than SMH does. SMH has a smaller bid-ask spread, which helps price-sensitive swing trading strategies. SOXX has a wider spread, which helps more risky momentum trading strategies. Another thing that makes SMH different from other companies is that it has the most open interest in its stocks.

Direxion’s Daily Semiconductor Bull 3X Shares (SOXL) and Daily Semiconductor Bear 3X Shares (SOXS) give people who are willing to take a lot of risk and pay a lot of money to be more involved in the semiconductor industry. These investments are supposed to make three times as much money as a typical sector index, but they don’t have to. This works well for long-term bets, but intraday returns can be very different because of a periodic calculation of relative value. This can lead to chaotic late-day price action that is very different from a non-leveraged sector ETF.


An ETF Trading Example

If you look at this chart, you can see how the iShares PHLx SOX Semiconductor Sector Index Fund (SOXX) did from December 2008 to January 2009. If you look at the chart below, you can see that SOXX shares broke out above the September high (blue line) in November. They hit an all-time high of 96.03 on December 1. Into February, it fell in a bull flag pattern (red lines). The breakout level and the 50-day EMA were where it came back in. The Nasdaq 100 took off on February 10 (black arrow) because of good news from abroad. It rose more than 1.3 percent. Because it did better than the S&P 500 and other large-cap indices. With SOXX up more than 3%, it broke out of the flag pattern and sent a big buy signal. Semiconductors are what keep that tech rally going.

The Bottom Line

Chip stocks make up the largest group of technology companies that are traded on US stock markets. There are so many different sub-components that there are endless opportunities for trading and investing in different market conditions. Semiconductor ETFs are also a good way to get in on the market.

About the author


Kathy Lewis

Kathy Lewis is an all-around geek who loves learning new stuff every day. With a background in computer science and a passion for writing, she loves writing for almost all the sections of Editorials99.

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