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Short SOX Are Now In Fashion

I mentioned recently that I wanted to get into some of the various stocks and discuss sector trading.  Semi conductors are a part of our every day lives and we depend on them in everything from our cell phones to our computers to our cars.  We will not discuss trading within this industry specifically but rather give a general overview of the sector itself along with the impact it has on the market. 

 Sector trading or sector analysis is basically looking at the group of stocks that make up a sector'.  Often many stocks considered to be within the same industry will be a part of an industry based association with common interests.  The semi conductor stocks have formed an alliance that is known as the Semiconductor Industry Association.  

 The semi conductor sector could be considered a subsector of the high tech industry.  Some of the stocks that can be associated with the semiconductor industry are INTC TXN AMAT BRCM AMCC PMCS and AMD.  These companies take the raw silicon and turn it into a computer chip.  Those chips are then used in all sorts of high tech gadgets around the world.  You may notice that these companies tend to develop products along the same time lines and release them along the same price guidelines.  The technology changes its architecture speed and release of new products in cycles thus the price of the stock can often be seen running in cycles.  

 When the industry is hot just about everyone is hot.  When the cycle turns everything suddenly turns very cold.  Therefore if DELL gets cold big problems could be on the horizon for some of their suppliers.  Markets forecast moves in advance and right now the SOX is telling us maybe things are not as good as we may think they are.  

 Since the semi conductor industry is a front loaded industry; it can be used to predict the general strength of the overall market.  It is the high tech version of the tool and die' industry.  When there is a great demand for tool and die manufacturing you can bet that a surge in overall manufacturing and in the economy is only a quarter or so away.  The same trend runs with the semis.  If the demand for PC's or PDA's is seen on the rise the manufacturers of those products must have semi conductors available to fill increasing demand of the consumers.  So they will place orders for more chips and they will tend to do this in advance so that supply can meet demand on the consumer side.  

 If we see weakness in the semi industry it could be a strong hint that the whole economy is generally weak.  If there is no demand for chips this means people are not buying PDA's PC's cell phones etc.  That is why the semi's are referred to as the leading index within the macro tech sector.  The NASDAQ will tend to react when semi conductor stocks are moving in either direction.  With this index currently sitting well below its 200 SMA you can predict where the NASDAQ (mainly tech stocks) maybe headed.

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