Recent strength in the semiconductor sector has restored faith in the ability of that group to set the tone for technology. And when we stop to consider that the 800-pound gorilla of Apple (NASDAQ: AAPL) is taking up an increasingly disproporationate amount of technology indices and ETFs (including the Technology Select Sector SPDRS ETF, a common proxy for the technology sector as a whole), the performance of semiconductor stocks in recent days relative to Apple-dominated tech has been perhaps that much more impressive.
For short-term traders focused on buying weakness and selling strength, there have been precious few opportunities to participate aggressively in these sectors. The Market Vectors Semiconductor ETF (NYSE: SMH), for example, has only closed in oversold territory for back to back sessions once since climbing back above its 200-day moving average in January. But even this is better than what the Technology SPDRS (NYSE: XLK) have provided mean reversion traders since returning to bull market territory. XLK has only closed in oversold territory once since rallying above its 200-day moving average in late December.
Strength in technology and semiconductor stocks has meant higher ratings and big, short-term edges in inverse leveraged tech and semiconductor ETFs like the Direxion Technology Bear 3x Shares (NYSE: TYP). TYP, which is inverse leveraged to three times the daily returns of the Russell 1000 Technology Index, has earned “consider buying” ratings of 9 out of 10 as of Friday’s close, and has a positive, short-term edge of nearly 1%.
Another option for traders, especially those wanting to focus specifically on the potential for a reversal to the downside in semiconductor stocks, is the ProShares UltraShort Semiconductors ETF (NYSE: SSG). The ProShares UltraShort Semiconductors ETF has also earned “consider buying” ratings of 9 out of 10 in trading on the final session of the week, having pulled back for the last four days in a row.
The last time the ProShares UltraShort Semiconductors ETF earned a 9 rating, the ETF finished higher the next day by more than one and three-quarters of a percent, and was up nearly two and half percent five days later. SSG is built to return twice the inverse of the Dow Jones U.S. Semiconductor Index.
Traders may want to note the potential for catalysts early next week in the form of quarterly earnings announcements from Hewlett-Packard (NYSE: HPQ) and Dell (NASDAQ: DELL). Although neither stock is among the top holdings of the XLK, for example, nor makes up a disproporationate amount of the Russell 1000 Technology Index, news that causes traders to accelerate profit-taking in formerly overbought technology stocks like HPQ and DELL could easily reflect positively on ETFs inversely correlated to the sector as a whole.
Coming Spring 2012: the second edition of How Markets Really Work: A Quantitative Guide to Stock Market Behavior by Larry Connors and Cesar Alvarez. Click here to learn more.
David Penn is Editor in Chief of TradingMarkets.com