This article was originally published on ETFTrends.com.
Semiconductor sector exchange traded funds popped after President Donald Trump said he could reverse the ban on telecom giant Huawei and renewed talks with China, but traders are now taking a harder look at the long-term outlook for the sector.
Semiconductor stocks are highly sensitive to trade developments since the industry's complex supply chain is closely tied to China. While optimism over renewed trade talks have helped lift the sector, some analysts highlighted a broader slowdown on the horizon, The Wall Street Journal reports.
Andrew Zatlin, the founder of South Bay Research, argued that weak sales in the semis industry could point to a sharp downturn in the global economy during the second half of the year since semiconductor chips are in everything from toys to airplanes and chip sales typically precede sales into end products that they are inserted into.
“It’s July,” Zatlin said. “This is when stuff gets made for the holiday buying season.”
According to World Semiconductor Trade Statistics projections, chip sales globally are calculated to dip about 12% this year from 2018. The trade group also anticipated sales to only rise 5% in 2020.
Zatlin argued that this new bust cycle in chip sales is a reflection of decreased demand across China, Asia, and Europe. Furthermore, this pullback is only about five months old and it does not appear to have bottomed out, which could be reflected on share prices in the coming months.
“We have a long way to go,” Zatlin warned.
For more aggressive, risk-tolerant traders, ongoing weakness in chip stocks could spell short-term opportunity with leveraged exchange traded funds, such as the Direxion Daily Semicondct Bear 3X ETF (SOXS) . SOXS attempts to deliver triple the daily inverse performance of the widely followed PHLX Semiconductor Sector Index (XSOX), the underlying index for SOXX.
For more information on the tech sector, visit our technology category.
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