The QQQ is headed into a historically bearish period
As mentioned in the space on numerous occasions, tech stocks and semiconductors have had a dizzying 2020 replete with euphoric highs and catacomb-level lows. This past week, several semiconductor stalwarts stepped into the earnings confessional, so it seemed like an opportune time to take the temperature of the sector in order to hopefully sharpen the focus for the coming months.
Taiwan Semiconductor (TSM) leads its chip peers in market cap, sitting at $376 billion as of Thursday. Yet at the same time, TSM shorts have built their positions heavily in the recent month, up 62% in the two most recent reporting period. Rounding out the top five are more familiar faces Nvidia (NVDA), Intel (INTC), Apple supplier Broadcom (AVGO), and Texas Instruments (TXN). In the past month, Intel and Nvidia have swapped places, with the latter toppling the psychologically significant $250 billion market cap level.
Intel raised eyebrows after its quarterly report disclosed that production on its vaunted "7nm" chips are running six months behind schedule. Now staring up at the -20% year-to-date level, analysts have soured on the icon, with 18 of 24 doling out "hold" or "strong sell" ratings. Of the top 20 semiconductor stocks in terms of market cap, Intel is one of only four that the majority of the analyst community skew toward "hold" or worse ratings on.
Lurking just beyond the top five is Qualcomm (QCOM), which gapped higher by 15.2% on July 29 after a fiscal third-quarter earnings beat. The blowout report – which resulted in no fewer than 12 brokerages adjusting their price targets upward – secured QCOM's place above the round $100 billion market cap level at $105.57 billion.
But perhaps the only company that had a better week than QCOM was Advanced Micro Devices (AMD). It's second-quarter beat-and-raise on Wednesday led to a new record high, and AMD overtaking the $75 billion market cap level. Yet at the same time, AMD's short interest/float percentage is the second-steepest among the sector, despite a 12.5% exodus from short sellers in the last two reporting periods.
As you can see, there are several backdrops that look inviting in this already appealing sector. But seasonal trends must not be neglected, especially during an election year. Schaeffer's Senior Quantitative Analyst Chris Prybal recently looked back at the last four election cycles, using the Invesco QQQ Trust Exchange Traded Fund (ETF) (QQQ) as a proxy.
The chart below indicates two years were extremely bearish; 2000 and 2008. The other three years were positive, including a five-month 16.1% return in 2004. When you consider that 2016 turned in a muted 0.4%, the connecting thread between 2000, 2008, and 2016 bearishness is the incumbent exiting the office. And digging deeper, it seems as though the market rises through August, then starts its descent as you begin September.
Focusing in on just August strengthens the case for caution. The QQQ's average August return since 2000 sits at a modest 2.4%. However, in election years, the percentage return plummets to -10.3%. More specifically, the year 2000 yielded a 34.8% August drop and 2008 resulted in a 34.6% fall. Those steep plummets weighed on the 2004 (14.4%), 2012 (0.5%), and 2016 (2.8%) positive returns.
There are of course countless other factors at play when examining election years and volatility through an investor-related context. But if one assumes for a second that regardless of outcome, we are headed for a two-to-three-month window of turbulence, then one way to de-risk your portfolio is maintaining options exposure. With that in mind, however one wants to play the semiconductor sector should know this; all of the chip stocks discussed above sport attractively priced premiums at the moment. INTC, QCOM, and AMD all sport Schaeffer's Volatility Indexes (SVI) that sit in the bottom 20th percentile of readings from the past year.
Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, August 2.