INDEX INTELLIGENCE: SMHSemis Off to a Strong Start

Semiconductor stocks rose early Tuesday after the latest data from the Semiconductor Industry Association [SIA] showed some improvement. According to the trade organization, worldwide chip sales rose to $20.6 billion in July 2007. That, in turn, represents an increase of 2.2 percent over last year and a 3.2 percent increase from June.

“Prices climbed slightly in several large segments of the semiconductor market, and price erosion in the memory sector slowed significantly in July as unit shipments grew, contributing to a sequential increase in worldwide chip sales,” said SIA President George Scalise, in an SIA September 4 press release.

In addition, “Major demand drivers for semiconductors – personal computers, cell phones, and other consumer electronic products – appear to be growing in line with analysts’ projections. At this stage, it does not appear that the fall-out from problems in the sub-prime mortgage arena has had a significant impact on consumer purchases of electronic products,” according to Scalise.

Indeed, many investors have been betting that the technology sector can weather the recent period of credit market turmoil. As evidence, many of the favorite technology names continue to do well. In the chip sector, the list includes SanDisk (). Shares of the chipmaker have posted five straight months of gains and, on the first day of September, the stock enjoyed a $2.04, or 3.6 percent advance, to $58.10. SNDK is up 35% on the year.

Other chip stocks have also performed well despite the problems plaguing other sectors of the market like financials and homebuilders. Shares of Intel, the world’s largest chipmaker, have rallied for an impressive 29.3 percent so far this year. Texas Instruments () is up 22.3%, Altera () has enjoyed a 23.6 percent advance, Amkor Tech () has gained 27.1 percent, National Semi () is up 18.2 percent, Applied Materials () has added 18 percent, and, as a result, the SMH is up 15.5 percent on the year. 

Figure 1: Semiconductor HOLDRS () Monthly Chart

Monday’s move pushed the Semiconductor HOLDRS towards $39.00 a share for the first time since late July. However, as we can see from Figure 1, it isn’t the first time the SMH has been at that level. In fact, $39.00 has been a difficult price level to breach numerous times in the past. For example, in early 2006, SMH tried, and failed, to break above that level on at least five occasions.

Now, however, the stocks have upward momentum once again and, if the trend can continue, it is possible that the SMH can break above $39.00 and make a run towards this year’s highs above $41.00. In that respect, there will be several key events to watch for including an earnings report from National Semiconductor on September 6, the release of the SEMI Book-to-Bill ratio on September 18, and then profit reports from Intel and others in mid-October.  

Frederic Ruffy
Senior Writer & Index Strategist
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