Will the Semiconductors Stall Out or Sell-Off?

To look at some of the major exchange-traded funds for the semiconductor industry is to see what most would consider a pure picture of strength. The ProShares Ultra Semiconductors ETF (NYSE: USD), for example, has closed higher for seven days in a row, six in overbought territory.

This is the backdrop against which a trio of semiconductor companies will be announcing earnings come Thursday, semiconductors that have been only a little less consistent than USD in demonstrating sector strength.

Shares of Cypress Semiconductor (NASDAQ: CY), for starters, have been fighting to climb back into bull market territory ever since the stock slipped below its 200-day moving average in August. Trading above that level on an intraday basis over the past several days, CY has spent the past week in a trading range, tending toward a slight overbought bias for most of the duration of that range. In fact, CY earned “consider avoiding” ratings of 2 out of 10 for three days in a row as the stock traded sideways near technically overbought territory.

That said, in its current position, Cypress Semiconductor is almost the epitome of a neutral stock. Shares have a neutral, 4 out of 10 rating and a neglible positive edge of less than half a percent.

In contrast to Cypress Semi are shares of Kla-Tencor Corporation (NASDAQ: KLAC). Shares of KLAC recently rallied to new, 52-week highs, and traders will no doubt be watching to see if the tentative selling that has taken place over the past week is the beginning of broader profit-taking in the group. KLAC has been trading above its 200-day moving average since October and is up more than 13% from its last significant pullback early in the second half of December.

Similarly trading at significant long-term highs are shares of Maxim Integrated Products (NASDAQ: MXIM), which has closed lower for two out of the past three days as traders begin to take profits.

Although Maxim Integrated Products has a neutral, 4 out of 10 rating, the stock has a short-term, positive edge of more than 50%. Additional selling in MXIM could go a long way toward improving both the stock’s rating and its short-term edge.

One way to take advantage of any potential near-term weakness in the sector is through inverse leveraged ETFs like the ProShares UltraShort Semiconductor ETF (NYSE: SSG). Shares of SSG fell by nearly 1% on Wednesday, closing lower for a seventh day in a row and earning “consider buying” ratings of 9 out of 10.

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David Penn is Editor in Chief of TradingMarkets.com