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Chip Rally Won’t Last? Use This Pairs Trade to Stay Ahead

by | Nov 19, 2021

I’ve been gearing up for a while to talk about semiconductors. Some of these stocks have been ripping higher lately — and it’s crazy.

One of the biggest reasons we’ve seen this semiconductor chip rally sustain itself for so long in the Consumer Discretionary sector ETF — ticker symbol XLY — is because of the semis.

When you look at the VanEck Semiconductors ETF (Nasdaq: SMH) or PHLX Semiconductor Sector (IndexNasdaq: SOX), you’ll see they have some of the best liquidity in the market. 

As I’m sure many of you are familiar with, traders check SOX if they want to look at the semiconductor index. They use the ticker SMH — the biggest ETF semiconductor — to trade it.

I mean, there’s a reason why WealthPress Senior Strategist Roger Scott is shorting the weakest stocks on the index — like Micron Technology Inc. (Nasdaq: MU) right now.

That’s because we don’t expect this semiconductor chip rally to last much longer…

How Much Longer Will This Semiconductor Chip Rally Last? 

Semiconductors are grossly overbought and the supply chain issues have already been priced in. Earnings season is over for them, and there’s no major catalyst on the horizon at the moment. 

We also already know the situation for them next quarter — people will buy a ton of technology for the holidays… and then wait six months to get it.

But if that’s the case, you might be wondering why this isn’t impacting the overall market…

Here’s the thing: We have a lot of Basic Material, Industrials and solar stocks that are trending higher right now. This was also the case a year ago in November and December when small caps were outperforming large caps.

However, there’s a certain way we see this playing out this year on the markets…

About 30% of the market cap in the Invesco QQQ Trust Series 1 (Nasdaq: QQQ) are chip stocks. When you look at the QQQ and then the chip stocks, you’ll notice they’re mimicking each other right now. 

It’s almost like looking at the same graph.

And we don’t see the semiconductor chip rally having much leg left to stand on.

There’s probably not going to be any major catalyst to the semiconductor sector to keep driving chips higher. You have to remember the market prices things in ahead of time, and we’ve been talking about shortages for months. So they’ll fall right back down to their base.  

I expect that move to push market cap away from Consumer Discretionary Select Sector SPDR Fund (NYSEArca: XLY), and back into the Consumer Staples Select Sector SPDR Fund (NYSEArca: XLP) — which are now at breakout levels. 

If we were a betting men, we’d be spreading consumer staples long and human discretionary short. 

But that’s not the only pairs trade on my radar this holiday season…

Check out the video below to learn more about how long the semiconductor chip rally will last, and other trades Roger and I are looking at!

And send any trading questions to jeff@joyofthetrade.com and stay ahead of the markets, especially these choppy ones, by subscribing to our YouTube channel

WRITTEN BY<br>Jeff Zananiri

Jeff Zananiri

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