Trading the Semiconductor Rally
Semiconductors are present in virtually every device that is computerized or uses radio waves. Given the prevalence of computers in modern human civilization, that means that semiconductor demand is closely tied to the health of the global economy.
As worldwide growth has slowed in 2019, presumably due to headwinds associated with the U.S.-China trade war, so too has the total demand for semiconductors. Back in July, the research group Gartner revised down their expectations for total semiconductor revenues in 2019 by 9.6%.
That implies that Gartner believes overall semiconductor revenue will drop from about $475 billion in 2018 to roughly $429 billion in 2019. It should be noted that an oversupply of semiconductors is also pushing down the average price realized in the market, which is why the decline in semiconductor demand appears in some ways more severe than the aggregate slowdown across the entire global economy.
Another important consideration related to semiconductors and the U.S.-China trade war is the fact that the dispute between the world’s two largest economies isn’t only related to imports and exports. Lying beneath the “trade deficit” narrative is an acute tug of war between these two nations over technology.
The United States has historically been the world’s leader in technological innovation, but significant and rapid advancements in China have put the country in a prime position to not only manufacture the world’s technological needs, but also to contribute to setting new standards across the industry.
Along those lines, one can’t forget that near the start of the U.S.-China trade war, it was the blacklisting of one of China’s tech darlings, Huawei, that provided a strong indication that growing competition between the U.S. and China in the technological space could top the list of geopolitical tensions in the coming decade(s).
While American companies had previously established the standard for software and hardware on both personal computers (Microsoft Windows and macOS) and smartphones (Android and Apple iOS), it was Huawei in China that was edging ahead in developing the next generation of cellular network technology—the so-called “5G,” or fifth generation of cellular network technology.
Cellular networks are represented by large-scale hardware and software installations strategically placed across a given country’s geographic land area that facilitates the transmission of data. 5G networks utilize denser arrays of small antennae in tandem with the cloud to offer data speeds 50 to 100 times faster than current 4G networks.
Semiconductor advancements are vital to the proliferation of 5G networks, which is one reason that demand for semiconductors could move back into positive territory in 2020 and beyond. While 5G installments are already taking place, it is expected that significant progress will be made in the next decade, which could represent a huge lift in demand for the semiconductor industry. By 2025, it’s forecasted that roughly 1.5 billion people on Earth will have access to 5G.
Based on recent performance in some of the best-known semiconductor ETFs, it looks as if investors and traders have indeed placed their belief in longer-term 5G optimism as compared to the 2019 downdraft in overall semiconductor revenues.
As of mid-November, the VanEck Vectors Semiconductor ETF (SMH) had increased 52% year-to-date. Likewise, the iShares PHLX Semiconductor ETF (SOXX) was also trading near 52-week highs and is now up more than 49% on the year.
Looking at some of the components of these ETFs, one can see why they’ve rallied.
Advanced Micro Devices (AMD), a component of SMH, is currently trading at 14-year highs. Nvidia (NVDA), also in SMH, has rallied from the $140s/share to above $200 in 2019 on the back of rising demand for its gaming and artificial intelligence chips. Intel (INTC) and Qualcomm (QCOM) are also riding high after positive earnings reports in Q3 2019.
Aside from following SMH and SOXX, traders seeking to expand their semiconductor horizons may also want to add First Trust Nasdaq Semiconductor ETF (FTXL), SPDR S&P Semiconductor ETF (XSD), and PowerShares Dynamic Semiconductors Fund (PSI) to their watchlists.
Traders may also want to review a recent episode of This Week In Stocks on the tastytrade financial network for further insight on the current semiconductor market landscape, including pockets of heightened implied volatility.Additionally, a new episode of Market Mindset focusing on some nuances of hedging as it relates to the technology sector may also be of interest.
Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about topics covered in this blog post, or any other trading-related subject, to support@luckboxmagazine.com.
