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Best Buying Opportunities in Semiconductor Weakness

This article was originally published on ETFTrends.com.

The 200-day moving average has been a support test for semiconductors and with the recent drawdown below that technical indicator, buying opportunities could be had for investors looking for leveraged plays like the like the Direxion Daily Semicondct Bull 3X ETF (SOXL) or the  Direxion Daily Semicondct Bear 3X ETF (SOXS) .

Given the performance run semiconductors have had in the last two years, analyst sentiment is beginning to sour with downgrades in big semiconductor names like Micron, Lam Research, Western Digital and Entegris. However, traders eyeing that 200-day moving average support level could stand to benefit if the semiconductor industry can stem the tide of tariffs.

Buying the Weakness in Semiconductors 1

Last week, the iShares PHLX Semiconductor ETF (SOXX) posted record outflows of $393 million and more could come if U.S. President Donald Trump moves forward with additional tariffs on $267 billion of Chinese products, which would include computer parts like semiconductors. Based on data from the Peterson Institute for International Economics, the list of possible targets from the U.S. trade representative on the goods, include tariffs on more than $15 billion in computer parts and another $8 billion in computers themselves.

The tit-for-tat tariff wars between the U.S. and China could wreak havoc on the semiconductor industry. This could possibly present a bearish play for SOXS to capitalize on what could be impending weakness on the semiconductor industry should these tariffs move forward and effectively diminish any profits from the sales of semiconductors as well as harm GDP. Or conversely, it could present a buying opportunity for savvy traders who see this as temporary weakness that is rife for buying opportunities.

"The tariff discussion, particular between the U.S. and China trade disputes is really more an investor issue than an economic one," said Omar Aguilar, Chief Investment Officer of Equities at Charles Schwab Investment Management. "A lot of the calculations around what can do that to the GDP is probably within the range of 25 to 30 basis points. However, when you think about what this can do for semiconductors, for example, it could actually take up to 25% of their earnings if these tariffs go into effect."

Today, last week's tech sell-off got a reprieve, which saw semiconductors rebound as evidenced in the 3.18% increase in SOXL, but moving forward, if the tariffs do materialize and the U.S.-China trade wars rage on, SOXS could be the long-term semiconductor play. Thus far, it has been the bulls winning the year-to-date battle with SOXL up 22.08% versus the 44.07% loss in SOXS.

"It's still too early to tell," said Aguilar. "But we have to wait for the next 60 days to see what the deal will be between the U.S. and China."

 

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