Texas Instruments, widely known as the bellwether of the semiconductor space, reported a big miss yesterday on the top and bottom line. With sales down 11% YoY and a downside Q4 forecast of $3.07-$3.3B compared to the consensus of $3.6B, the stock slipped just around 10%.
Semiconductors trade like commodities in that they are highly cyclical, and the timing of the end of the cycle is typically sudden and a sharp move.
I encourage you to review the technical outlook in the Nvidia PDF that I wrote mid-September. The global outlook around the KOSPI as well as the Philadelphia Semiconductor are still in place and have not changed much, since my last writing.
In other words, the KOSPI is in a bear market with weak momentum, suggesting a lower leg, and the Philadelphia Semiconductor Index (SOXX) is still trading in an ascending wedge pattern with weakening momentum.
The US semis are crucial and we’ve now seen two warnings – Texas Instruments and Micron. Xilinx didn’t have the best quarter-over-quarter results even if they did beat analyst estimates. This quarter, Xilinx reported $833 million in revenue down from $850 million last quarter. EPS was flat at $0.94.
To highlight the SOXX ETF, which tracks the Philadelphia Semiconductor Index, you can visually see this pattern unfolding. Notice how the index has been making higher highs while the momentum indicators in the RSI and MACD are decelerating, making lower lows.
The technical evidence coupled with the recent earnings reports of Micron, Texas Instruments and today’s Xilinx suggests that this pattern should resolve to the downside.
Our primary entry target is Nvidia. This is a high conviction, long-term hold.
Also, it’s one of the strongest names in the semi sector, and any cyclical slowdown has not caught up to the sentiment in Nvidia. As you can see, its momentum is also fading as it is failing to break and close above the $200 region.
If you’re bearish on semis, the easiest way to play this position would be either short or buy a put on SMH or SOXX, which are both ETFs. The SMH tracks the VanEck Semiconductor Index while the SOXX tracks the Philadelphia Semiconductor Index.
However, SOXX has a few more names and also caps the allocations allowed, so it’s technically more diversified. Either option should be sufficient. As more earnings flow in, we should get a clear direction for the near future. In the mean time, I’ll leave you with a quote from the recent Texas Instruments (TXN) earnings call.
In the quote below, TXN states their negative results are due to a broad-based macro slowdown on the earnings call.
“I can sense that you collectively are unsatisfied with our answers, and I understand that. We have close to 100,000 different customers, and we sell about 100,000 different products. It’s difficult to pinpoint any one thing, but the sense we get, talking to those customers, getting input from them, from our sales people and all the touchpoints that we have, is that the weakness is broad-based. It’s due to macro events and specifically the trade tensions. And if you think about when there’s tensions in trade and obstacles to trade, what do businesses do? They become more cautious, and they pull back. And we are at the very end of a long supply chain, and when the ones at the very front pull back, it becomes a traffic jam. And so our sense is that is what’s happening in the marketplace. But we’ll see what other companies will report over time and we’ll get a clearer picture over the next several weeks and really quarters, because this thing, we’ve been in it for now four quarters, and it’s going to be longer than that.”