Semi-Conductors are in a Bubble

The Moral Economist
Oct 21 · 4 min read
Vanguard’s International Semiconductor ETF TPEX compared with the Dow going back to 2016. The ETF has out performed the Dow almost this entire period, but if we are about to entire a recession, then surely the correction in semis will be even more sharp, right?

If you’re like me and think we are probably headed for a recession, then we have to deal with some contradictory information. Why are semiconductors holding up? After all, semis (both of the conductor and trucking sort) are cyclical and if we are cycling downhill, shouldn’t semis be tanking?

Not necessarily, since we are still at all time market highs. And there’s been some very interesting movements happening within this ETF and chart, particularly with Nvidia and Intel.

Adding Nvidia to our comparison and our chart looks absurd. It peaked at at 900% return when trading nearly $300/share, and it now still trades orders of magnitude better than the entire market return sitting at nearly a 600% gain since mid 2016.

Zooming in to the last 1.5 years, we get a clearer picture. Nvidia outperformed Intel until late 2018 when the broader market collapsed. We can interpret this as risk-off, since Nvidia is a smaller company and therefore arguably more speculative.

Intel is a well-respected company that has stood the test of time. Intel didn’t peak until nearly $60/share at the end of April, before the trade war. Since then, we’ve seen a low of $43 and are now back at $51.50 after a weekly peak of $53.

Unless the Thursday and Friday negative trend reverts immediately on Monday or Tuesday, we could be looking at a big sell-off. Since September, the daily chart looks like a double top. August peaks are starting to look like resistance building.

Likewise, Nvidia’s year chart is pretty bearish. While we’ve retraced and filled the December 2018 gaps, we are having trouble reversing the sentiment. It’s important not to get too caught up on the technicals, given that we breached April highs, which triggered bullish momentum buying.

Volume has been relatively low, and the bull run quickly ran out of steam. If Monday starts fighting lower, an Nvidia short throughputs could make for a fairly nice 2–5 day swing trade. Unlike Intel who reports this week, they don’t report earnings until mid-November, meaning it will trade correlated with the Nasdaq but with a much higher beta.

Clearly there is some bullishness working in Nvidia’s favor. You can’t deny that it has closed the gap on Intel in the past few weeks. But is this fundamental? Or is it fueled by speculation, with traders reminiscing of the $250+ glory days of only a year ago?

Sure the trade war calmed down a little now that Trump is worried about being impeached. But Intel failed to breach the same pattern highs, further indicating that Intel is the safety trade and Nvidia is the speculative trade.

I was going to say that Nvidia is probably one of the top held stocks on Robinhood, but I can’t find Robinhood’s top held stocks anymore! Did they remove them since it is a way for the smart money to short what the crowd thinks? Robinhood isn’t about giving that data away for free. No, they’d rather make money from high-frequency traders screwing over small investors, but I digress.

Bottom line doesn’t necessarily short Intel for earnings. We have until Thursday for earnings expectations across the board to cool off. We’re unlikely to breach new highs until trade war and impeach uncertainty clears. Therefore, shorting Nvidia could be an even better opportunity, since we are already at yearly highs and a negative sentiment reversal could really punish Nvidia and bring us back to the more reasonable $175 level by the end of the week.

Disclosure: I currently hold Intel January 2020 $50 puts. I am considering swapping those for Nvidia puts given that options earnings premium may lead to substantial decay. That’s also why I am buying far enough in advance to hold on if I am wrong about earnings but right about the broader market.

Disclaimer: This content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this post constitutes a solicitation, recommendation, endorsement, or offer by myself to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. The opinions expressed in this publication are those of the author.

Data Driven Investor

from confusion to clarity, not insanity

The Moral Economist

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Data Driven Investor

from confusion to clarity, not insanity

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