Have the Semiconductors Rallied Too Far, Too Fast?
Whatever you make of Deutsche Bank’s recent upgrade of the semiconductor sector, there’s no denying the love investors have felt for these stocks in recent days and weeks.
From its last oversold finish in mid-December, the ProShares Ultra Semiconductors ETF (NYSEL USD) is up more than 21%. The Market Vectors Semiconductor ETF (NYSE: SMH) added nearly 10%. Over the same time period, technology as a whole was up half as much (basis the Technology Select Sector SPDRS ETF (NYSE: XLK).
Much of this love for semiconductors is as seasonal as egg nog lattes. But as the typically choice period for holding semiconductor stocks gives way to the more equivocal months of spring, what best practices should guide the trading and active investing in this sector in the near-term?
Heading into trading on Tuesday, the ProShares Ultra Semiconductors ETF is again overbought, and has closed in overbought territory for the past five days in a row. The same is true for the Market Vectors Semiconductor ETF. Note also that USD has earned “consider avoiding” ratings of 2 out of 10. Traders looking for further upside from this sector may want to wait for these overbought conditions to subside before taking new position on the buyside.
Traders interested in digging deeper into the semiconductor sector will find stocks like Applied Materials (NASDAQ: AMAT) and Broadcom (NASDAQ: BRCM) climbing further into extreme overbought territory. Both AMAT and BRCM are trading in bear market territory and may become targets for short-sellers either looking to bet against the sector outright or to hedge long bets on potential pullbacks in overbought semiconductor stocks on the bullish side of the 200-day moving average such as Sandisk (NASDAQ: SNDK) and Intel Corporation (NASDAQ: INTC).
The annual Consumer Electronics Show has been heralded by some as a short-term catalyst for these and other technology stocks. But with so many semiconductor and technology stocks already overbought going into the CES event, traders should not be surprised if the what the catalyst ignites is selling in the technology rather than buying.
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David Penn is Editor in Chief of TradingMarkets.com.