Semiconductor ETFs: An Important Test For How High The Market Can Fly

Mr. Market is always looking ahead. He’s not particularly interested in Q1 GDP… the assumption is that the economy grew at 3% or better. He’s not even concerning himself with Q1 earnings results… the expectation is that most corporations will handily exceed top-line revenue and bottom-line profit projections.

So what is Mr. Market wondering about these days? He’ll be looking for signs from companies that private sector job growth will increase as the year progresses. Mr. Market will want to hear guidance for increasing sales that can justify the rise in share prices. And he’ll need to get an idea from the highly influential semiconductor space that smart phones, iPads, netbooks, notebooks, GPS devices as well as servers will require substantial quantities of semi chips through the duration of 2010 and beyond.

Yeah, the tech sub-segment is critical. Consider this: All of the broad-based U.S. ETFs — PowerShares Nasdaq 100 (QQQQ), SPDR S&P 500 (SPY) and Dow Diamond Trust (DIA) — have rocketed past the January 2010 highs.

Yet that’s not the case for the semi space. Major players such as Semiconductor HOLDRS (SMH) are still battling to “take out” the levels notched during January’s glory.

In many ways, a continuation of the overall upward stock asset bias will be heavily dependent on Intel’s guidance next week. If Mr. Market interprets Intel’s forward-looking projections as a sign of a global tech boom, we can expect both the Nasdaq proxy (QQQQ) and SPY to celebrate.

On the other hand, what if Intel’s visibility is shaky? What if we’ve over-estimated pent-up worldwide demand for chip-dependent tech products? What if businesses feel they can continue to compete globally as well as maintain productivity without upgrading? What if the world isn’t quite ready for the “super-tech” cycle that requires more complex semiconductor chips in ever increasing quantities?

One thing is clear; that is, at this moment, semis are lagging behind Mr. Market. And that’s the exact opposite of what investors should expect from a truly self-sustaining economic expansion.

Semiconductor ETFs Versus Mr. Market in 2010
% Gain (1/1-4/8)
PowerShares Dynamic Semiconductors (PSI)					3.9%
SPDR Semiconductors (XSD)					2.1%
iShares GS Semiconductor (IGW)					1.5%
Semiconductor HOLDRS (SMH)					1.1%
S&P 500					6.4%

 

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