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Friday, September 20, 2013

Does Seasonality Move Semiconductor Stocks?

By Todd Campbell
The Seasonal Investor

Seasonality does move semiconductor stocks, and I'll get to that in a minute.  

I've been researching seasonality and its impact on the markets for a decade.  And even before that I was using seasonality without knowing it.  You see, I worked in retail.  And if we didn't have the right stuff at the right time there would be hell to pay.  So we made sure we studied historical sales data to identify what sold best at what time of year.  These studies allowed us to own the products our consumers wanted, when they wanted them.  Makes sense, right?

Your stock portfolio is like that retail store.  If you own the right product at the right time, more people will want what you have in stock.  So, the key to making sure you're carrying the right inventory is research.  You need to know what works best at what time.  And, you need to position yourself accordingly to make the biggest profit.

There are some sectors and industries that move even more predictably than others.  This 'handful' of seasonal plays serve as a cornerstone for seasonal strategies and they all share something in common.

The semiconductor industry is one of these cornerstone baskets.  They trade in very predictable pattern for some very real reasons.   

Do you own a smartphone?  A computer?  A tablet?  A TV?  What time of year did you buy it?  Did you get it as a gift?  Did you buy one for a family member?  More often than not, semiconductor packed electronics are sold during the holidays.  That means they need to be built months beforehand.  And it means the semiconductors used to build them need to be ordered in time for production to ramp up to full speed.

As a result, the semiconductors getting packed into the latest gadgets are typically ordered not in June or July, but instead  they're ordered in the first quarter.

As you might imagine, since investors tend to move from one area to the next depending on sales, earnings, technicals or any other common form of analysis, they tend to avoid semiconductor stocks when orders are down and embrace them when orders rebound.

Consider this first chart.  It shows the average book-to-bill, or the amount of semiconductor equipment ordered relative to the amount of semiconductor equipment delivered, by month.  What do you notice in this chart?  Semiconductor equipment demand is weakest in fall and demand builds into winter, peaking in April.



Now, consider this next chart.  It shows the monthly performance for the semiconductor exchange traded fund (XSD).  Do you notice the similarity?  The best performing months are December through April.  

So, what this means is there's a really good chance owning semiconductors as inventory in your portfolio heading into winter is the right trade.  



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