Up until the stock market bubble burst, many viewed the semiconductor sector as a leading indicator for other technology shares. Lately, however, the relationship has gone signficantly awry.
Since the year began, the Philadelphia Semiconductor Index -- which has an equivalent exchange-traded fund, the Semiconductor HOLDRs Trust ETF (AMEX: SMH) -- has lost 3.4%, trailing far behind the 25.5% rise in the Nasdaq 100 index -- which has an equivalent exchange-traded fund, the Powershares QQQ Trust ETF (NASDAQ: QQQQ) -- as well as the 8.6% gain in the S&P 500 index.
Although many technology stocks have been boosted by the prospect of strong overseas growth and momentum-driven buying, semiconductor shares have been under a great deal of pressure, hurt by disappointing earnings and outlooks from companies like KLA-Tencor (NASDAQ: KLAC) and SanDisk (NASDAQ: SNDK), along with persistent talk of a chip glut.
Still, even taking into account the fact that the divergence between semiconductor shares and other technology issues has been steadily growing since late 2003, the recent sharp widening of the gap suggests things have probably gotten overdone.
Moreover, it seems that plenty of bad news is already factored in as far as the semiconductor sector is concerned, while the broader market appears priced for perfection. Together, the combination points to a short-term trading opportunity.
Depending on your market outlook and risk tolerance, it may be a good time to sell the Powershares QQQ ETF; buy the Semiconductor HOLDRs Trust ETF; or, execute both trades as part of a matched pair.
Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.
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