Semiconductor sector looking semi-sweet

ETFs

Why is the semiconductor sector looking semi-sweet? Because the Market Vectors Semiconductor ETF (SMH) is almost at a perfect entry point. If it were a few dollars lower, it would be looking real sweet.

Since the beginning of 2013, the overall market has been on a great run. The S&P has gained just under 30% during the bullish run and investor sentiment has vacillated more so than the market itself. The semiconductor sector has traded alongside the S&P with a small advantage over the overall market with a gain of just under 34%.

Both the S&P and the SMH have been in trend channels for the past year and five months. We see the weekly chart of the S&P below and you can see the upper and lower rails of the channel.

The weekly chart of the SMH shows its trend channel as well, but there are two noticeable differences between the two charts. Both of the differences are based on the weekly stochastic readings. First, the S&P is in overbought territory based on the stochastic readings whereas the SMH is not in overbought territory. The second difference is the trend in the stochastic readings for the SMH. The last two dips down to the lower rail have come when the stochastic readings were higher than the previous dip. In other words, the SMH isn’t selling off as much and this has created an upward trend in the stochastic readings.

What these differences suggest to me is that the semiconductor sector and the SMH are ready to outpace the S&P in the coming months.

In addition to the technical outlook being promising, the sentiment toward the sector is more pessimistic than the overall market. Pessimistic readings from the sentiment indicators are a good thing based on contrarian investing. The main sentiment indicators that I use are the short-interest ratio, the put/call ratio and the analyst ratings. I developed a sentiment composite system based on the readings from these three indicators. Below is a table of the top ten holdings in the SMH.

% of Assets Stock Short Interest Ratio Put/Call Ratio Percentile Weighted P/C Ratio Buys Holds Sells Total Ratings Hold/Sell Percentile Sentiment Composite

18.7

INTC

5.5

0.4

0.2

15

23

6

44

6.59

12.29

12.9

TSM

3.6

9.3

4.65

2

3

0

5

6.00

14.25

5.3

MU

3.2

4.9

2.45

19

11

4

34

4.41

10.06

5.0

TXN

2.8

2.5

1.25

9

24

4

37

7.57

11.62

4.6

ARMH

4.1

2

1

9

3

0

12

2.50

7.60

4.5

BRCM

2.2

4.1

2.05

22

16

3

41

4.63

8.88

4.5

ASML

3.7

1.4

0.7

6

3

3

12

5.00

9.40

4.5

ADI

2.7

0.5

0.25

12

15

0

27

5.56

8.51

4.4

AMAT

5.4

0.7

0.35

11

8

2

21

4.76

10.51

3.6

XLNX

1.2

5.8

2.9

18

9

0

27

3.33

7.43

  AVG.

3.4

3.2

1.6

12.3

11.5

2.2

26.0

5.0

10.1

 

Because we are viewing this data from a contrarian viewpoint, the higher these numbers are, the more pessimism there is toward the stock. I typically look for a sentiment composite reading in double digits for a bullish play and in the case of the top ten holdings in the SMH, the average sentiment composite is 10.1 and the top four holdings have an average sentiment composite reading of 12.05. The top four holding represent almost 42% of the assets held in the fund.

In order to give you something to compare this data to, I took the average of 100 random stocks that I have looked at over the last few months and the average sentiment composite for those hundred stocks was 8.49. This gives you an idea of how the semiconductor sector is out of favor versus the overall market.

The reason we look at the sentiment indicators is to determine when there might be more buyers than sellers. After all, that is when the price of a stock goes up. We look at technical analysis to try to find patterns that repeat. With the SMH, we have an ETF that is in an upward sloped trend channel and the sentiment toward the sector is more pessimistic than the overall market. That is the kind of scenario that I look for when making a bullish bet.

Actionable Advice: I would look to go long the SMH and hold it as long as it remains in its channel. If you like to try to time your trades, looking for the perfect entry, you can wait for a dip down to the lower rail or until the stochastic readings hit the 50 level. It is only 6.5% from the present level to the lower rail.

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