Trade chips will fall where they may

  • Semiconductor stocks especially vulnerable to trade-war
  • Chip stocks pulled back more than the broad market this week
  • New tariffs set to begin Friday if talks fail

Yes, we’ve been down this road before, although it’s been a while.

After a few months of being an afterthought, US–China trade negotiations have again grabbed hold of the market psyche, and they aren’t likely to release it until Friday, the day the White House has pledged to slap new tariffs on Chinese goods if a trade deal isn’t reached.1

Chip stocks are trade war bellwethers because of the huge exposure many of them have to China.

Just a reminder, we’ve been down that road before, too: The big reveal on Friday may be that there’s no trade deal—but also no tariffs, and both sides have “agreed to continue talks.” In which case all the fretting may have been for nothing, at least until the next deadline rolls around.

In the meantime, the Market Fret Factor has been fairly elevated, with the Cboe Volatility Index (VIX) on Tuesday hitting its highest level since January, and the S&P 500 (SPX) dropping nearly 3% on the week before stabilizing.

PHLX Semiconductor index (SOX), 5-minute, 5/3/19–5/8/19. PHLX Semiconductor index (SOX) price chart. Chips hit harder.

Source: Power E*TRADE

But the PHLX Semiconductor Index (SOX), which hit a new all-time high on April 24, was down more than 5% on the week at its worst on Tuesday (chart above), as chip stocks are bellwethers for the ups and downs of the trade war because of the huge exposure many of them have to China.2

Lest we forget, China makes lots of electronics, and if failed trade negotiations and new US tariffs trigger retaliatory measures from China, they’re likely to hit where it hurts. Counter-tariffs (or an outright ban) on the US chips that go into many of those electronics is the kind of shot that could leave an unsightly economic mark.

The following chart shows the year-to-date (YTD) returns of several chip (and chip-related) stocks: Qualcomm (QCOM), Advanced Micro Devices (AMD), NXP Semiconductors (NXPI), Nvidia (NVDA), and Applied Materials (AMAT). Although all of them turned lower this week, as of yesterday the smallest YTD gain any of them had posted was around 28%, and the top three—QCOM, AMD, and NXPI were all up more than 40%.

Semiconductor YTD gains, 12/31/18 – 5/8/19. Qualcomm (QCOM), Advanced Micro Devices (AMD), NXP Semiconductors (NXPI), Nvidia (NVDA), and Applied Materials (AMAT) price chart. Stocks process a pullback.

Source: Power E*TRADE

This week’s trade battle has the potential to determine whether the recent semiconductor pullback turns into something more. So, let’s consider three possible developments—in no particular order—on Friday:

1. No deal is reached, the US implements new tariffs, and China, presumably, retaliates.

2. The US and China agree on a deal.

3. No deal, but no tariffs, and a pledge to continue negotiations.

Forget about assigning odds to any of these outcomes—that part of the equation is ultimately unknowable. What matters are the implications of each, and it’s a good guess that Door Number 1 could send the market sharply lower, Door Number 2 could send it sharply higher, and Door Number 3…

Well, there’s an argument to be made that this may also send stocks higher because the world would have, for the present, avoided the worst-case scenario. And it would mean that chipmakers will still be selling their products to China.

So, with two out of three scenarios having the potential to unleash an up move (which may last an hour, a day, or a month—who knows?) in the broad market, and perhaps a bigger one in the semiconductor space, it may seem logical that traders would be leaning to the long side. But you can bet the experienced ones aren’t discounting the possibility of the worst-case scenario, and are planning accordingly.

It’s one thing to miss out on potential profits, but it’s much worse to risk large losses unnecessarily.  

Market Mover Update: Leading up to this morning’s earnings release, Ubiquiti Networks (UBNT) rallied nearly 3% intraday yesterday.

Today’s numbers (all times ET): International Trade (8:30 a.m.), Producer Price Index, PPI (8:30 a.m.), Jerome Powell Speaks at the Federal Reserve System Community Development Research Conference

(8:30 a.m.), Wholesale Trade (10 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Bioscrip (BIOS), Brookfield Asset Management (BAM), Cardinal Health (CAH), (CRCM), CenterPoint (CNP), Duke Energy (DUK), EPAM Systems (EPAM), Focus Financial (FOCS), Keurig Dr Pepper (KDP), Tapestry (TPR), Ubiquiti Networks (UBNT), Booking Holdings (BKNG), Dropbox (DBX), Symantec (SYMC), Yelp (YELP), Zillow (ZG).



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1 The New York Times. U.S.-China Trade Talks to Resume Despite Trump’s Tariff Threat. 5/7/19.

2 If these stocks break down, then you know the trade war is serious. 5/7/19.

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