With no shortage of near-term headwinds for tech stocks, it makes sense to look at the semiconductor group today, given what is still fairly dramatic relative out-performance to the S&P 500 (SPX) and the Nasdaq Composite (CCMP). For the purposes of this post, we are going to look at the SMH, the etf that tracks the Philadelphia Semiconductor index (SOX). The SMH, despite being down nearly 8% from its intraday all-time high on March 13th, the etf is still up 10% ytd, vs the SPX which is now down 1% on the year and the CCMP up 3%.
The outperformance in the SMH has comely largely from continued positive sentiment related to a continuation of M&A activity that has topped $300 billion over the last few years, a supercycle in chips of all kinds for emerging technologies like AI, Autonomous Driving, AR/VR, Crypto Mining, and a longer than normal memory cycle.
In the last few weeks though there have been some speedbumps in this narrative. First, the White House put the kibosh on Broadcom’s attempted acquisition of Qualcomm has sent the message that it will be very difficult for foreign buyers to acquire our tech companies. This has led to heightened tensions, specifically with the Chinese on the potential for further protectionist actions on both sides as the White House also announced punitive tariffs, specifically targeting China. Given that the majority of chips that go into consumer electronics sold into the U.S. come from China, this could present a significant near-term challenge for U.S. chipmakers.
Additionally, Micron (MU) the memory chip maker, that was up 50% earlier this year, reported results that should have caused the stock to rally, but the stock is down 6% as I write, maybe we are seeing a sentiment turn towards the length of the cycle.
Aside from high expectations, strong fundamentals and prospects for new growth verticals, the technical set up for the SMH could be challenged, with the potential for a check back to the uptrend that has been in place for the last year in the mid to high $90s. To my eye, the break below the recent breakout to new highs at $110:
And the five-year chart, with the uptrend from the 2016 lows shows technical support in the mid $90s:
So what’s the trade? If you are inclined to think that Semis could be one of the of hardest hit groups in tech from any sort of retaliation from the Chinese in an escalating trade war, that MU’s reaction today could spell a significant sentiment reversal and the charts could suggest a move back to support, then defined risk bearish strategies make sense.
SMH $106 Buy May 105 / 95 put spread for $2.50
-Buy 1 May 105 put for $4
-Sell 1 May 95 Put at $1.50
Break-Even on May expiration:
Profits of up to 7.50 between 102.50 and 95 with max gain below 95
Losses of up to 2.50 between 102.50 and 105 with max loss above 105
Rationale: this trade idea may feel like a press after the etf’s 8% decline, but if the broad markets are going to test their February lows, I am hard-pressed to think that the SMH would not go unchanged again on the year, which would still represent material outperformance to the broad market,