Are Semiconductors Topping Out?

As the Nasdaq moved to fresh 52 week highs two days ago, the semiconductors failed to confirm this move to new highs. After having recently broken back above their 50 Day SMA, the inability of the semiconductors to move to new highs alongside the Nasdaq is a negative divergence. Having been a big leadership group for the Nasdaq since equities bottomed in March, this recent negative action in the group bears watching in here with a potential top possibly being put in.

It will be interesting to see how the group acts today after being downgraded this morning by Bank of America Merrill Lynch. Citing "a period of rapid replenishment of inventory and normalization of semi shipments to 'true' consumption levels, inventories in the supply chain are approaching a level suggesting a modest overshoot vs. equilibrium levels," the broker said. INTC, TXN, MRVL, & LSI were cut to neutral from a buy rating while MXIM, NSM, POWI, & MCHP were cut to underperform from a neutral rating.

Not surprisingly, the charts on all of the aforementioned chip plays seem to all have the same chart patterns. All of these stocks have recently moved back above their 50 day SMAs. TXN is the only stock in this group to have recently made fresh 52 week highs. POWI and INTC's charts look the best after TXN with MXIM and NSM's charts appearing to be in trouble.

While not short any stocks in the chip sector yet, it seems as though the winners and the losers in the group have begun distinguishing themselves. With some patience and perseverance a few could ultimately become good short sale candidates as the moving averages move into positions where supply seems ready to overtake demand.

Disclosure: No position in any of the semiconductor stocks mentioned in this article.

Comments

[David Van Knapp]

I don't get the appetite for risk implied by waiting breathlessly for a sub-group of a sub-sector to move into such a position that it (or its individual stocks) can be shorted. With the whole market still going up, the risk-reward ratio on any short plays seems like a bad deal.

Judging from the comments all over SA, people have been killing themselves for months making such bets, then having to scramble to cover them when they don't work out. Then they complain that the market's rigged. If it's a zero-sum game, then there has been a massive transfer of money in the last few months from people playing it short to people playing it long. People complain about Obama/Democratic wealth-transfer plans...then do it to themselves by making trades such as the potential one suggested here.

2009 Nov 19 08:36 AM

[tech_analyst2009]

I really would not discount the semi stocks yet. Yes, a lot of semi shipments have been due to channel refilling. However, much of the play has been to cater the consumer demand. There is still potential for growth as enterprises move into their PC/IT replacement cycle in 2010.

2009 Nov 20 06:58 AM