ETF Watch: The Trouble With Semiconductors (SMH,XSD, SPY)

We have seen a steady climb up again this week in stocks.  The market may have not been in a straight line but it did trend higher.  What we wanted to look at were the key semiconductor ETFs to see what is happening here.  Despite a recent price rise in some NAND and in other areas, we are not seeing chip stocks participate as much as the broad market.  The move is likely tied to caution of supplies ahead of earnings season and a weaker-than-expected PC market.  If everyone is buying an iPad or a tablet, they are probably not buying a PC along with it at the same time.  

The Yahoo! chart here for the Semiconductor HOLDRs (NYSE: SMH) and SPDR S&P Semiconductor (NYSE: XSD) have just not been able to keep up with the S&P 500 measured here by the SPDR S&P 500 (NYSE: SPY) ETF. 

If you look further on, the Semiconductor HOLDRs (NYSE: SMH) chart from StockCharts.com explains more of the issue.  We did not show it, but the SPDR S&P Semiconductor (NYSE: XSD) chart looks the same on the moving average front. 

It is the 50-day moving average acting as an overhang.  After the 50-day moving average was violated in early March it killed the momentum.  Now that shares have recovered it is obvious on the overhang.  We would like to note one key issue here: if semiconductors manage to rise early next week, technicians will be calling this a trend reversal and breakout.  That is just how it works. 

If semiconductor companies do not start issuing earnings warnings in the next few days, then it seems likely that the investment community will begin to believe that the chip companies have a better underlying business than what was being priced in.

JON C. OGG