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Why the red-hot semiconductor stocks could rally on

  • Semiconductor stocks are on a tear this year.
  • Some strategists say some bullish options market activity, as well as the stocks' technical setup, points to more gains ahead.

Semiconductor stocks are on a tear this year, and some strategists say the stocks' technical setup, along with some bullish options market activity, points to more gains ahead.

Two popular semiconductor-tracking funds, the SMH and the SOXX, have both advanced roughly 20 percent year to date.

"When I think of the semiconductors space, I kind of visualize that five years ago they basically threw a bunch of the spaghetti at the wall to see what would stick. And we're currently in an environment where a lot of things have stuck," Stacey Gilbert, head of derivative strategy at Susquehanna, said Tuesday on CNBC's "Trading Nation."

It's thanks to the recent advances in artificial intelligence, autonomous driving and data centers that semiconductor stocks have enjoyed such a rally, Gilbert said.

She continues to like Micron, a semiconductor stock that's surged nearly 41 percent so far this year, and pointed to recent bullish call buying in the options market. That activity, along with consolidation in the space and positive margins, encourages her that there's more room to run.

When it comes to Nvidia, which has risen nearly 36 percent so far this year, Gilbert said she "loves the story" but recognizes it's currently carrying a valuation akin to that of an established technology brand like Intel without the same kind of revenue.

"We love the name; we like it more on a pullback," she said, and said selling upside calls (or selling downside puts for an entry point) is a better way to play the name than simply buying the stock, "where we think valuation-wise it's just gotten ahead of itself."

From a technical perspective, Micron appears poised to rally further, according to Rich Ross, head of technical analysis at Evercore ISI. As Micron is trading just below $31 per share, Ross sees potential for the stock to hit $34 per share.

"The trend is strong here, and there's no signs of trend exhaustion," Ross said Tuesday on "Trading Nation."

Examining a chart of Micron over the last year, he pointed out the stock has held its 50-day moving average for the majority of that time, and has recently broken out of a trading range between about $26 and $30 per share.

On a longer-term chart going back to 2014, "if you traded the stock out there, you know it's feast or famine with this one. And right now, the stock is feasting. You've tripled off the lows, momentum is strong, and I think you can make a complete round trip over time back to the old highs from 2015, around $40."

The SMH was slightly lower and the SOXX was modestly higher in Wednesday trading.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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