Stocks on the frontline

05/21/19
  • Chip stocks led the market lower Monday amid Huawei fallout
  • Semiconductor index close to retracing half of its December–April rally

Depending on which area of the market they were looking at, two traders could have had very different impressions of what was going on Monday.

People casually browsing the ticker a couple of hours into the trading session may have noticed the S&P 500 (SPX) and Dow Jones Industrial Average (DJIND) were both off around -0.4% on the day, yawned, and started flipping through the latest “What Did They Leave on the Set of Game of Thrones This Time?” headlines.

But tech traders were undoubtedly aware the Nasdaq 100 (NDX) was down a much more meaningful -1.3%, and they also likely knew this bearish wind was blowing from the chip industry: The PHLX Semiconductor Index (SOX) was down more than -3% amid a White House ban on US companies doing business with Chinese tech giant Huawei, and reports that Alphabet (GOOGL) and Xilinx (XLNX), among others, were complying.1

That put the SOX off a little more than 15% from its April all-time high, and came close to erasing about half of the index’s December-April rally:

PHLX Semiconductor Index (SOX), 12/19/18–5/20/19.Semiconductor stock index (SOX) price chart. Retracement mode.

Source: Power E*TRADE


If you haven’t been following the Huawei story, it’s arguably become the epicenter of the US–China trade battle. Depending on who or what you believe, the company’s technology is a de facto tool of the Chinese government to facilitate spying on other countries and companies, or the US is simply using Huawei to increase its leverage in the seemingly never-ending trade negotiations. Or both.

But the bottom line is that a lot of semiconductor companies do business with Huawei, which is the biggest telecom supplier in the world, and the No. 2 smartphone maker.2

 

Advanced Micro Devices (AMD), NXP Semiconductor (NXP), and Qualcomm (QCOM), 4/26/19–5/20/19. Semiconductor stock price chart. Weathering the storm.

Source: Power E*TRADE


Although some chipmakers have broken down below notable support levels in recent weeks and days, the chart above shows three chip stocks that have fared better than most since the sector began selling off in late-April: Advanced Micro Devices (AMD), NXP Semiconductor (NXP), and Qualcomm (QCOM). All three definitely took their lumps yesterday, but they also all still have double-digit gains for the year, with AMD leading the pack up more than 50%.

Recent trade-war developments have put extra pressure on chip stocks—and there’s no telling how long that could continue—but many tech traders are likely keeping it in the back of their minds that positive trade headlines have the potential to trigger sharp rallies in the stocks that have taken some of the heaviest fire on the frontlines of the battle.

Traders need to keep one eye on the news ticker, and the other on the charts of chip stocks to know when they’re approaching key support levels.

Market Mover Update: Both Sprint (S) and T-Mobile (TMUS) jumped big yesterday as their proposed merger got a thumbs-up from the head of the Federal Communications Commission (FCC).2

Today’s numbers (all times ET): Existing Home Sales (10 a.m.).

Today’s earnings include: AutoZone (AZO), Home Depot (HD), Kohl's (KSS), TJX (TJX), Nordstrom (JWN), Toll Brothers (TOL), Urban Outfitters (URBN).

 

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1 MarketWatch. Google, Xilinx begin to comply with Trump ban on China’s Huawei.

2 Cnet.com. The Huawei controversy: Everything you need to know. 5/20/19.

3 Reuters. T-Mobile's $26 billion deal for Sprint gets big boost after FCC chief gets behind it.

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