The Xchange Blog

Semiconductor Trade: Canary in the Coal Mine.

Semiconductor stocks are somewhat of a canary in the coal mine for technology and broader electronics demand. In turn, some consider tech stocks to be leading indicators for the broader equity markets. A strong rally in tech can push stocks to new highs, but with the return of volatility, semiconductors will have to rally if markets want to return to a high water mark. So how do you think semiconductors will perform in the near future?

Amid all the U.S. and China trade war talk, traders are wary. We know that the U.S. companies most highly exposed to China-based revenue streams are of course semiconductor stocks. The sector has been extremely sensitive to the prospect of losing access to China’s cheap manufacturing facilities, along with its customer base.

Traders who bet on Direxion’s Daily Semiconductor Bear 3X Shares ETF (SOXS), benefited from the fact that the entire PHLX Semiconductor Sector Index has been the victim of a month-long selloff, driven by fears that chip makers will lose the lion’s share of their sales to China. If the pall of trade war talk dissipates, will holders of Direxion’s Daily Semiconductor Bull 3X Shares ETF (SOXL) be rewarded as earnings season continues?

SOXL and SOXS Performance

Data Range: 6/19/2018 – 7/19/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For standardized performance and the most recent month-end performance, click here.

Here’s the lowdown on a few of the biggest names in the PHLX Semiconductor Sector Index. They started reporting earnings next week.  

 

Qualcomm Inc. (Earnings Release 7/25/2018)

EU regulators have bolstered their case against Qualcomm where the U.S. chipmaker has been accused of dumping – selling chipsets below cost to drive out a rival. Qualcomm, the world’s leading chipmaker, has been in the EU crosshairs since 2015 when it was charged with predatory pricing aimed at forcing out British phone software maker Icera between 2009 and 2011. Qualcomm was fined 997 million euros this past January after the European Commission said it breached EU rules by paying iPhone Apple to use only its chips in an effort to block rivals. The chip maker could face another fine if found guilty of breaching EU antitrust rules.

Intel (Earnings Release 7/26/2018)

According to Zacks Investment Research, based on 13 analysts’ forecasts, the consensus EPS forecast for the quarter is $0.99. The reported EPS for the same quarter last year was $0.72. Shares of Intel dipped after Evercore ISI analyst C.J. Muse downgraded the stock to in line from outperform. He sees a number of reasons why Intel’s stock is unlikely to outperform peers, including delays for the company’s 10-nanometer transition and the recent resignation of Brian Krzanich, formerly Intel’s CEO.

Applied Materials (Earnings Release 8/16/2018)

Applied Materials, Inc. is currently rated as outperform by 24 stock analysts. Over the course of a year, the stock has fallen by 8.71%. But financial analysts are becoming very bullish, with the 19 analysts who cover the stock advising investors to buy. Right now it’s trading roughly around 25% below its 52-week high.

Broadcom (Earnings Release 8/30/2018)

Broadcom designs, develops and supplies analog and digital semiconductor connectivity products. Last week, the company announced an acquisition of CA, Inc. and its stock immediately plummeted 17%. Traders sold based on the sentiment that CA is primarily sells mainframe software, and investors typically flock to companies they feel have the latest technology. But Broadcom has a track record of successful acquisition, and the stock has somewhat rebounded. Broadcom’s shares still may seem inexpensive to some, which could make them attractive at the current price, especially if earnings and projections are solid. Over the past 60 days, Broadcom has seen nine positive revisions to its fiscal 2019 earnings estimates.

Micron Technology (Earnings Release 9/25/2018)

Since the last earnings report for Micron Technology, shares have been down. But this quarter may see a move to the upside. According to Yahoo Finance, the company’s outlook for this quarter projects revenues in the range of $8-$8.4 billion. Gross margin is projected between 59% and 62%, with earnings per share to be roughly $3.30. Will the recent negative trend continue or is Micron due for a breakout?

Below is a chart that includes the earnings release dates for the top ten constituents of the PHLX Semiconductor Sector Index (XSOX). For a broader list of earnings release dates for semiconductor names click here.

PHLX Semiconductor Sector Index (XSOX)
Top 10 Weights Ticker Weight in the index Earnings Release Date
BROADCOM INC AVGO UW 0.082291 8/30/18
NVIDIA CORP NVDA UW 0.081499 8/9/18
QUALCOMM INC QCOM UW 0.080443 7/25/18
TEXAS INSTRUMENTS INC TXN UW 0.07993 7/24/18
INTEL CORP INTC UW 0.075644 7/26/18
MICRON TECHNOLOGY INC MU UW 0.04154 9/25/18
ANALOG DEVICES INC ADI UW 0.040703 8/29/18
MICROCHIP TECHNOLOGY INC MCHP UW 0.040542 8/2/18
TAIWAN SEMICONDUCTOR-SP ADR TSM UN 0.038818 7/19/18
APPLIED MATERIALS INC AMAT UW 0.038265 8/16/18

If you’re really bullish on semiconductor earnings and think it’s the canary that will lift all tech stocks, you may all want to consider Direxion’s Daily Technology Bull 3X Shares ETF (TECL). The bears may consider a bold trade with the Direxion’s Daily Technology Bear 3X Shares ETF (TECS).

 

Related Leveraged ETFs

 


Each leveraged ETF seeks investment results that are 300% of the return of its benchmark index for a single day. Each Fund should not be expected to provide returns which are three times the return of benchmark’s cumulative return for periods greater than a day. Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment.
 
SOXL/SOXS Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Each Fund does not attempt to, and should not be expected to, provide returns which are three times the return of their underlying index for periods other than a single day. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, and risks specific to the Semiconductor Industry, such as Large-Capitalization Company Risk, Small- and/or Mid-Capitalization Company Risk, for the Direxion Daily Semiconductor Bull 3X Shares, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk, and for the Direxion Daily Semiconductor Bear 3X Shares, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.
 
TECL/TECS Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Each Fund does not attempt to, and should not be expected to, provide returns which are three times the return of their underlying index for periods other than a single day. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, risks specific to the Technology Sector, such as Technology and Telecommunications Risk, for the Direxion Daily Technology Bull 3X Shares, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk, and for the Direxion Daily Technology Bear 3X Shares, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.
 
PHLX Semiconductor Sector Index (XSOX) – Measures the performance of domestic companies engaged in the design, distribution, manufacture and sale of semiconductors. One cannot directly invest in an index.
 
Technology Select Sector Index (IXTTR) – Provided by S&P Dow Jones Indices and includes domestic companies from the technology sector which includes the following industries: computers and peripherals; software; diversied telecommunications services; communications equipment; semiconductors and semi-conductor equipment; internet software and services; IT services; electronic equipment, instruments and components; wireless telecommunication services; and office electronics. One cannot directly invest in an index.