When the chips are down…
- IPHI rallied nearly 130% off March lows to last week’s record high
- Stock has outperformed chip sector by wide margin in recent months
- Price pulled back closer to key support level yesterday
One of the oldest stock-trading rules of thumb is to buy a leading company in a strong industry or sector when it’s pulling back. Like most things in trading, it’s easier said than done, but there’s sound logic in attempting to capitalize on weakness when you expect strength to reassert itself.
That brings us, as it often does, to tech, which led the US market to the upside when stocks began fighting their way back from the March lows. But even though the Nasdaq 100 (NDX) rallied to record highs last Thursday and Friday, the tech index wrapped up its third-straight week as the worst-performing major US index.
While some people might see that as worrisome for the entire market (i.e., if tech doesn’t lead, what will?), others may see it as a predictable—and temporary—rotation away from an area that has already racked up huge gains, and still leads the broad market by leaps and bounds from a longer-term perspective.
Those traders who expect tech to regain its mojo before too long may also have noticed that chip stocks have been one of the stronger tech industries in recent weeks. The PHLX Semiconductor Index (SOXX) has actually outperformed the NDX by more than 10 percentage points since late March. Sector strength, check.
So, yesterday’s appearance by semiconductor component manufacturer Inphi (IPHI) on a list of stocks with high put-call ratios was a bit conspicuous, as heavy put options volume can sometimes signal traders are leaning toward bearish bets on a stock:
Source: Power E*TRADE
IPHI was trading lower on the day, too, and was down around 13% from the all-time high of $127.78 it made last week.
Before that, though, the stock had skyrocketed nearly 130% off its March 23 low, outperforming almost any high-profile chip stock you care to name (as of yesterday, it was still up around 100%). Stock strength, check.
Monday’s selling dropped prices a little closer to a well-defined support level—a former breakout level around $102, which the stock gapped above on May 8 after beating earnings:1
Source: Power E*TRADE
The stock jumped higher after pulling back to test that level five days after the breakout. Bullish swing traders may continue to reference it as a line in sand: Another retreat to that approximate level may be an opportunity to play another upswing, with the understanding that a continued decline below it could be the signal to wait for another day.
IPHI has a big presence in the cloud and telecom spaces, which may be why some analysts have cited its potential in the event the “Reopening Rally” has legs.2 Stocks like IPHI, which have arguably benefited by the technology demands placed on companies during the lockdown, could get an additional boost if and when tech as a whole gets back into gear.
Weakness in a strong stock in a strong sector, against a backdrop that contains the possibility of a larger technology reboot. And a support level that has already shown its relevance once in recent weeks.
There are never any guarantees, but many pullback traders would likely tell you that you can’t ask for much more than a trade setup that allows you to clearly define potential risk and reward.
Market Mover Update: JD.com (JD) closed lower yesterday, but not before hitting a new record high of $60.29, a 17.2% gain since March 28 (see “Making a list, checking it twice”).
Today’s numbers (all times ET): NFIB Small Business Optimism Index (6 a.m.), JOLTS (10 a.m.), Wholesale Trade (10 a.m.), FOMC meeting starts.
Today’s earnings include: Five Below (FIVE), Lovesac (LOVE), Chewy (CHWY), Verint Systems (VRNT).
1 StreetInsider. Inphi Corp. (IPHI) PT Raised to $122.50 at Needham & Company. 5/8/20.
2 Zacks.com. 3 Semiconductor Stocks to Buy for the Coronavirus Reopening Rally. 5/27/20.