Trouble in Tech? Don’t Blame the Semiconductors

It is helpful for traders to remember that only one of the top ten holdings in the ^XLK^ is a semiconductor stock – ^INTC^.

On a day when semiconductor stocks, as measured by the ^SMH^, finished off their highs but up more than half a percent on the session and closer to short-term overbought than short-term oversold, this may be a distinction that is much, if not all, of the difference in the performance between the broader technology sector and the semiconductor subgroup.

From the point of view of the trader, this means that there is strong change of upside in the near term in XLK ,and that it is possible that the semiconductor stocks might even underperform relative to such a move.

Heading into trading on Monday, the XLK has closed lower for five days in a row, the last four in oversold territory above the 200-day moving average. By contrast, the SMH has actually edged higher over the past two sessions, leaving oversold territory and, as I mentioned above, and likely to wind up in overbought territory on any significant follow-through buying on Monday.

One problem is that XLK is trading below its 200-day moving average, which will put the fund off-limits for many traders. A solution to this is to trade a leveraged version of the technology sector ETF, insofar as the price behavior of leveraged funds is not bound by the 200-day in the way it is for non-leverage ETFs – at least not in our research.

In part this is because leveraged ETFs like the ^TYH^ and even the ^REM^ need to reach truly extreme levels before they earn the sort of “consider buying” ratings that will put these ETFs on the watchlists of short term traders and active investors. For example, TYH has “neutral” ratings of 5 out of 10 ahead of Monday’s open after dipping to near oversold territory on Thursday. TYH bounced a little more than half a percent in Friday’s session.

Remember, when trading leveraged ETFs, be sure to reduce your position size accordingly. In other words, if you are trading a 2x ETF, cut your regular trading size in half. If you are trading a 3x ETF, then use a third of your regular trading volume. This will help prevent you from taking on a larger position than you might have intended due to the built-in leverage of 2x and 3x funds.

The ETFs in today’s report were drawn from the data and research available through PowerRatings. To find out more, click here.

David Penn is Editor in Chief of TradingMarkets.com