Strength Is Building In Semiconductor ETFs

Semiconductor stocks traveled a rough road in the first 8 months of the year as investor interest honed in on high flying biotechnology and consumer discretionary sectors. Nevertheless, this stalwart industry is making a strong case to win “comeback player of the year” award in 2015, as key semiconductor ETFs and stocks are gaining momentum.

The largest of the semiconductor ETFs in this segment is the iShares PHLX Semiconductor ETF (SOXX), which has over $420 million dedicated to 30 domestic semiconductor companies.

Top holdings in SOXX include well-known names such as Intel Corp (INTC), Texas Instruments (TXN), and Qualcomm Inc (QCOM).

Since hitting a low in August, this semiconductor ETF has risen well over 20% and appears poised to rally above its 200-day moving average in the near future as well.

iShares PHLX Semiconductor ETF (SOXX) – 1 Year Chart

Probably the more interesting pattern for market technicians to get behind is the higher lows this ETF was able to maintain towards the end of September. Unlike the SPDR S&P 500 ETF (SPY), which came down and successfully tested its prior low, this semiconductor index was able to maintain much stronger relative positioning on the chart. That pattern has worked to create greater momentum than the broad market as the October rally continues to mature.

Part of this semiconductor strength is being driven by aggressive merger and acquisition activity throughout the industry. Broadcom (BRCM) was bought out earlier this year and Intel took over Altera Corp (ALTR). Speculation regarding further consolidation or buyout potential may be helping to fuel this most recent rally as well.

In my opinion, this sector represents an important pocket of energy that may play a role in defining how high the market can go from here. Because the semiconductor stocks were so beaten down earlier in the year, there is still a great deal of upside potential across the sector relative to other opportunities. Nevertheless, it also pays to respect how high this index has rallied from its lows and not get overly bullish after a sharp run up in price.