2024-01-03 10:42:09 ET
Summary
- The bull market since October has been strong, particularly in risk-on areas like semiconductors.
- The Direxion Daily Semiconductor Bull 3X Shares ETF offers leverage and efficient capital exposure to the semiconductor sector.
- Caution is recommended in the short term but I see potential for a continued bull market in semiconductors in 2024.
The bull market that has taken place since late October has been nothing short of breathtaking. Pretty much everything is higher, and the largest beneficiaries of the rally have been risk-on areas of the market. That’s typical for extremely bullish periods, and as we look into 2024, I see more bullishness ahead.
However, we appear to be in need of some consolidation and that’s especially true for the semiconductors. I’ve been bullish on the semiconductors and remain so, but they’ve come too far, too fast at the moment. I like the Direxion Daily Semiconductor Bull 3X Shares ETF ( SOXL ) for exposure to the semis. First, it does a great job of tracking its index, and second, it offers leverage for capital efficiency.
In this article, I’ll maintain my bullish stance on the semis, but note where I think it would be most advantageous to buy SOXL, as I think we need further evidence of a bottom before jumping in. Therefore, my buy rating is for the medium term, while noting short-term caution. Let’s dig in.
What is SOXL?
In short, SOXL is a 3X leveraged product that tracks the NYSE Semiconductor Index. That index is one that holds a combination of semiconductor manufacturers and those that make related materials and equipment.
It is a very long way from being a diversified fund; it’s an extremely concentrated bet on a specific subsector of technology equities. That increases risk, but also increases potential reward.
Given SOXL is an ETF that seeks to return 3X the daily return of the semiconductor index, it’s extremely volatile. Options on SOXL at the moment have implied volatility of about 70, which is something like ~ 6X that of the S&P 500, just for some context on what we’re dealing with here.
For these reasons, SOXL is a trading vehicle, not something you buy and forget about for years. It's a product that allows targeted exposure for relatively short periods of time in order to maximize return on invested capital. Returns go both ways, however, and there's a lot of risk involved.
Leveraged products are riskier than their non-leveraged counterparts, so keep that in mind as we go through the setup here. If you're looking for further reading on how these products work - and the risks involved - there are terrific resources available. Both FINRA and the SEC have resources for investors to arm themselves with knowledge to trade these products. I'm not going to go through what's in the linked posts but I just want to make it clear there are enhanced risks anytime leverage is employed.
With that out of the way, let’s look at the setup.
A bull run that needs a breather
We’ll start with a chart of SOXL itself, but do the real analysis on the semiconductor index that SOXL tracks (or at least a proxy for it).
SOXL rose 127% from the October bottom to the peak a few trading days ago, which is about on par with the last big rally that started in May of last year. The problem is that this one-way action has left the fund extremely overbought an in need of a pullback and/or consolidation. We can see it’s already off almost 15% from the high, including an 11% beat down on Tuesday. I fear there may be a bit more downside short-term given the way the index itself is trading. Let’s now take a look at the index itself to see what sort of target we should place on SOXL.
We’re using the SMH ETF below as its correlation to SOXL is very close to 100%, so it’s an excellent non-leveraged way to view SOXL’s prospects.
I’ve placed support at the prior high of $164, as well as the double top from July at $160 as levels to watch. The 20-day exponential moving average failed yesterday and unless it is regained quickly, my base case is a 50-day simple moving average test.
The good news is that the 50-day SMA is $159 and rising, which means that when/if the index reaches that level, we’ll not only have major moving average support, but also the two support levels identified above. That confluence of support should create a favorable spot for the bulls to make their stand.
Now, we’re talking about another 3% to 6% in round numbers of downside risk in the index, or about 9% to 18% in SOXL. That means I’m placing my downside target at $23 to $25 on SOXL, and that’s where I’m interested in longs. My view is that we’ll see the selling take the fund down to that area, and then we’ll see renewed buying activity, so that’s my plan.
Rates remain a tailwind
I have made it very clear in my pieces here on Seeking Alpha that I am bullish for 2024, particularly in tech stocks. Semis are a big beneficiary of tech bull markets, and SOXL is 3X leveraged to that so the potential here is huge, if you can properly manage risk. I’ve hopefully made it quite clear not only that SOXL inherently has a lot of risk, but also where you can consider taking a position to minimize your risk and boost the odds of a favorable return on capital.
Now, let’s take a look at a big tailwind that I think will help renew this bull move in the relatively near future.
Below we have the 50-day rolling correlation of the semiconductor index to the 10-year Treasury yield, and we can see it’s -0.94 . That means rates and the semis move almost perfectly inversely to each other.
That implies that we can look at rates as a secondary clue as to where the semis may trade, given we can reasonably expect rates and the semis to move opposite each other. Let’s now take a look at rates to see what we can learn.
The massive uptrend in yields that ran from May to October was decisively broken and hasn’t even come close to recovering. It is not a coincidence that equities behaved roughly opposite of this chart in 2023, as equities tend to perform the best when rates are low and/or falling. That’s particularly true of tech stocks, and certainly true of the semis.
My view on rates is that so long as the 10-year remains below that critical level of about 4.00% to 4.10%, it’s a good thing for equities. The 10-year is coming up against the rapidly-declining 20-day EMA right now, which itself is just below that critical level noted. To my eye, that means this recent bounce is likely very near its end, and when/if the bounce in rates ends, we’ll see risk-on equities start to outperform once more.
The bottom line
This all lines up very nicely in my view, and that’s why I think we have the potential for some short-term continued weakness in the SOXL. This weakness, I believe, will be measured in days and not weeks, and that once a new relative low is formed, we’ll be off to the races once more.
If we sum all this up, I see SOXL as a great way to take advantage of what I believe will be a continued bull market in semiconductor stocks in 2024. There is great risk in owning any leveraged fund, and SOXL is no exception, so be prudent with your stop losses and position sizing, if you decide to use it at all.
My target downside for this current selling on SOXL is about $23 to $25, and I see it as a strong buy at those levels. This selling should abate in the coming days as I believe interest rates are going to make a local top before continuing their downtrend.
For further details see:
SOXL Is A Buy For 2024, But Patience Is Key