Semiconductor Stocks Are Tired… Make These Two Trades Today

We’re almost halfway through earnings season, and the semiconductor exchange-traded funds (ETFs) are starting to show signs of wear.

The latest reports from Intel (INTC), AMD (AMD), and Micron (MU) gave positive outlooks – except for Intel – but investors are still applying selling pressure to the semiconductor stocks.

Normally, it would be easy to say that this was due to a “sell the news” movement after earnings, but there’s something else happening here…

One that’s leading to a pair of trades that could help you make money in both the short term and long term...

For the year, the VanEck Semiconductor ETF (SMH) is trading 20% higher. Compare that to the Nasdaq 100’s performance of 3% for the same period and you get the importance of the semiconductor sector as part of the market.

Over the last two months, we’ve seen SMH shares begin to carve out a negative trend that looks to carry the chip sector into an early summer slump.

After positive highs in early March, shares of the SMH have declined 16% to their April lows. Over the last two weeks, we’ve seen a surge of buying, but you know what that’s from… the traditional “buy the rumor” activity ahead of chip earnings.

With earnings all but finished in the sector – the big earnings show will be Nvidia (NVDA) reporting on May 22 – the chips are left to settle back into their bearish glidepath.

Last week, the SMH’s 20-day moving average crossed below its 50-day, a sign that intermediate-term momentum has turned negative on the semiconductor sector.

We’ll get to how to trade this in a moment, but first let’s ask why? I think asking “why?” leads to a larger question that we’ll talk about over the next few weeks.

Investors have been chasing semiconductor stocks for the last year as the main way to play the AI Trade. That trade is starting to feel a little worn out, but more importantly, we’re starting to get signs that the economy may need to be slowed more by the Federal Reserve.

Small caps and semis are what I always watch when it comes to a market that needs to take a rest.  Not-so-coincidentally, those are the two sectors that have started to cross into an early corrective trend.

Again, not-so-coincidentally, both ETFs – the SMH and IWM – just completed the same negative momentum crosses, indicating that May is heading for a weaker than normal performance.

Here’s How to Approach the Situation

If you own the semiconductor sector ETF (SMH, XSD or any other) with profits, consider reducing you position and setting a target to buy those same shares back at prices that are another 10-15% lower than where they stand today.

If you’re an aggressive trader, start to think about adding an inverse semiconductor ETF, like the Proshares Ultrashort Semiconductors (SSG) to your portfolio. These shares increase 2% for every 1% the semiconductor sector trades lower.

Set a target of 20% gains on the SSG position and then consider closing that and using the proceeds from the position to buy back into the bullish semiconductor trade. That’s how the pros do it.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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