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Slumping Semis: Chip ETFs Try To Get It Together

October 19, 2015 3:49 pm
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Fourteen of the 30 members of the Dow Jones Industrial Average are down year-to-date and 11 of those 14 are down at least five percent. Intel Corp. (NASDAQ: INTC), one of the world's largest semiconductor manufacturers, is a member of that dubious group of 11.


Given its heft (the company currently has a market value north of $159 billion), it is not surprising that Intel has been a drag on semiconductor exchange traded funds. For example, the Market Vectors Semiconductor ETF (NYSE: SMH) and the iShares PHLX Semiconductor ETF (NASDAQ: SOXX) are off 1.5 percent and 4.3 percent, respectively, this year.


Last week, Intel reported revenue of $14.5 billion (marking a 10 percent quarter-over-quarter gain), which topped the $14.2 billion the Street was expecting. Pro forma earnings per share of $0.64 was also higher than the $0.59 per share the Street was looking for, Benzinga reported


On the bright side, Intel has rebounded since last week's earnings report. Including a Monday gain of 1.1. percent at this writing, shares of Intel are up 4.3 percent over the past week. Predictably, that is good news for ETFs such as SMH and SOXX. SMH, home to nearly $402 million in assets under management, has an almost 18.3 percent weight to Intel, making the stock the ETF's largest holding by nearly 600 basis points over Taiwan Semiconductor Co. (NYSE: TSM).


The $405.6 million SOXX features an 8.7 percent weight to Intel, also good enough to make the stock that ETF's largest holding. As a result of recent bullishness surrounding Intel, SMH and SOXX are up 3.3 percent and four percent, respectively, over the past week. However, that sturdiness has some options traders bracing for a near-term pullback in chip ETFs.


With the Semiconductor sector creeping higher in recent sessions on heavy trading volume in SMH (Market Vectors Semiconductor, Expense Ratio 0.35%), we witnessed at-the-money put buying involving the November 54 strike puts. The 200 day MA in SMH is slightly overhead of current levels in the product at $54.15, with the ETF trading at around $53.96 in the early going today. SMH has flirted with its 200 day MA during the past four trading sessions including today but has thus far failed to pierce this level and stay there, and it is worth noting that it has not been above its 200 day MA since late June of this year. What is interesting about the recent put buying in the product is that the two top reporting members of the underlying index, INTC and TSM weighting have already reported their quarterly earnings results,” said Street One Financial Vice President Paul Weisbruch in a note out Monday. 

Flows data indicate put buying in SMH could be protective in nature as traders and investors have recently been returning to semiconductor ETFs. For example, since the start of October, SMH has added nearly $190 million in new assets while SOXX has seen inflows of $23.2 million.

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