By Jim Woods
Stocks started this week off strong, with the major averages surging nearly across the board. The gains in the market also included stocks in the tech sector, which haven't kept pace with the broader market in recent weeks. Yet one sub-sector of the tech sector has had a much rougher go of things lately, and that is semiconductor stocks.
After the closing bell Tuesday, we received word from the biggest semiconductor maker, Intel Corp. (Nasdaq: INTC), and that word wasn't very good. The chip giant reported a decline in both revenue and profits, and while both metrics came in above recently downward revised analysts' expectations, the numbers were well below what everyone was hoping to see.
Things actually get a bit worse for Intel when you dig deeper into the details. That's because doing so unearths an 8% drop in PC chip sales. The numbers also reveal a 5% sequential drop in sales in Intel's data center business.
Now as you might expect, Intel shares were punished in Wednesday trade, falling some 2.5% by the closing bell. The decline in Intel shares, however, wasn't felt in rival Advanced Micro Devices (NYSE: AMD). That stock surged nearly 3.4% in that session.
Still, the overall trend in the chip sector is for ratcheted-down expectations going forward. The aforementioned AMD actually cut its sales projections last week, and like Intel, the company cited a "challenging macroeconomic environment" as the reason for the lowered forecast. Fellow semiconductor firm Microchip Technology (Nasdaq: MCHP) also recently cut its outlook due to global slowdown fears.
So, what do we make of the Intel numbers and the reaction of the markets?
I think the first thing to note is that these lowered metrics actually set us up for a surge in the space if things improve even the slightest bit. For traders, that means that getting into the battered sector now before a "slight improvement" rebound takes place is potentially a great way to get in on a good value with a lot of upside potential.
My preferred way of getting long semiconductors is via the Market Vectors Semiconductor ETF (NYSE: SMH). This exchange-traded fund is designed to replicate the price and yield performance of the Market Vectors US Listed Semiconductor 25 Index.
This index reads like a who's who of the top 25 semiconductor stocks in the space. As you might expect, Intel is the biggest single holding in Market Vectors Semiconductor, with 19.9% of the fund's assets. Taiwan Semiconductor (NYSE: TSM) is next with 14.4%, followed by Texas Instruments (Nasdaq: TXN) at 6.8%, ASML Holdings (Nasdaq: ASML) at 5% and Broadcom (Nasdaq: BRCM) at 4.9%.
If we look at the 52-week price chart here of Market Vectors Semiconductor, we can see that the fund is well off its March highs. We also can see that the latest wave of selling began in August, and with a few brief moves to the upside, it's been downhill ever since.
Technically speaking, we saw a slide below both the short-term, 50-day, and long-term, 200-day moving averages midway through September. This slide resulted in a marked downturn in Market Vectors Semiconductor to current levels. And while the breaking down of a fund like this below both its 50- and 200-day averages is a bearish indicator, in the case of Market Vectors Semiconductor, it's actually been the precursor to a strong move higher.
When both of these technical levels were violated in December, the result was a major move higher of nearly 25% in just about three months. More recently, we saw a breakdown below the 50- and 200-day in July, and from the lows of that month through the August highs, we had a gain of nearly 13% in just four weeks.
The point here is that tech stocks of the variety held in Market Vectors Semiconductor are trader favorites, and as such, there tends to be some very strong upside when buyers take hold of the sector. When this happens again, we are liable to see some very big gains in a very short time -- gains you'll want to participate in via Market Vectors Semiconductor.
Buy Market Vectors Semiconductor at the market price. Set stop-loss at $28.78. Set initial price target at $37.55 for a potential 20% gain in 10 weeks.
Disclosure: Jim Woods does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of INTC in one or more if its “real money” portfolios.