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Semiconductor stocks have been flying lately, apparently reinforced by Intel's (NASDAQ:INTC) excellent earnings report.

Reading the Intel conference call transcript (see here), however, there were some notes of caution sounded by CEO Paul Otellini. He was positive on the remainder of the year but he was careful not to get carried away in his enthusiasm.

Now comes another sign that maybe investors should ratchet up that sense of caution. Reading the Digitimes.com web site, there was a small article that raises the hair on the back of my neck. Here's what they said:

Taiwan Semiconductor Manufacturing Company (TSMC), alarmed by its rising inventory level, has demanded IC design houses take delivery of their ordered wafer starts before placing new orders, according to industry sources.

The company is seemingly worried by the possibility that their clients might have been overbooking. The article went on to say that TSMC's inventory of analog ICs is currently 50% higher than its safe level, while inventories of both network- and consumer-related IC segments have also exceeded their safe levels by about 20%, which has sent TSMC undertaking inventory control measures.

So the question I have is whether this is a company-specific situation or whether it will turn out to be the beginning of an industry-wide slowdown. If inventory is building up at the source of the semiconductor supply chain, it doesn't bode well for the the chip companies that are further up the ladder. Are they seeing demand dry up? Is this just a temporary speed bump due to modest overbooking? Or is the tech rally running out of gas?

If this situation persists or spreads to other chip manufacturers, it might be time to start looking at the ProShares Ultra Short Semiconductor ETF (NYSEARCA:SSG).

Source: Is the Semiconductor Rally Coming to an End?