Trading Nation

Chip stocks surge after earnings beats. Buyer beware, says market watcher

Trading Nation: Semis in a correction

Chipmaker stocks are in rally mode Thursday after Qualcomm and Advanced Micro Devices posted earnings beats, but one market watcher says to temper expectations of a long-term sectorwide rally.

"I don't love the space," Michael Bapis, partner and managing director at the Bapis Group at HighTower Advisors, told CNBC's "Trading Nation" on Wednesday. "It's coming off a monster rally in 2017 and it's still trying to find its footing."

The semiconductor space has been one of the best performers for markets since 2016. The VanEck Semiconductors ETF (SMH) surged 34 percent in 2016 and 36 percent in 2017, breezing past the Nasdaq's gains in both years.

Trading over the past month put a stop to that rally. SMH gained in the beginning of the year and quickly recovered from a February lull to hit a record intraday high in mid-March. In just more than a week, it has tumbled close to year-to-date lows. The ETF declined below its 200-day moving average at the beginning of the week.

SMH is down 14 percent from the 52-week high set in mid-March. That puts the ETF's drop above the 10 percent level indicative of a correction.

The chipmaker stocks, having benefited from buzz around certain tech developments, will now be judged on their individual merits, said Bapis.

The group "has ridden the coattails of all these technology booms with bitcoin, with everything that's happened in technology," Bapis said. "Certain names will ride those waves in 2018 but it's going to be very specific names and you can't just own the group. It's going to be specific stocks as a stock picker's index for 2018."

Boris Schlossberg, managing director of FX strategy at BK Asset Management, has also grown more bearish on the sector.

"It has become a very 'blah' industry. There's just no hits anymore," Schlossberg said on "Trading Nation" on Wednesday. "Think about smartphones, you think about desktops, laptops, servers, there's just no kind of a breakthrough product anymore. Because it's such a mature demand I think basically you're just not seeing any kind of sizzle."

Semiconductor demand is expected to grow in 2018, though not at the breakneck pace seen in previous years. U.S. chip stocks are forecast to post 10.8 percent sales growth in 2018 and half that in 2019, according to FactSet data. Sales rose by more than 13 percent in 2016 and 17 percent in 2017.

"Taiwan Semiconductor warned a couple of days ago that the sales aren't going to be that good. And I think that's going to be a uniform story going forward," said Schlossberg." "There's just not that much consumer excitement or front-end excitement for demand for the products at this point"

Taiwan Semiconductor cut its full-year sales outlook last week. The chipmaker cited expected softer smartphone sales and unpredictability surrounding the demand for crypto-related semiconductors.

The SMH ETF, an index which contains 25 of the largest U.S.-listed chipmaker stocks, is expected to post 21 percent earnings growth and nearly 13 percent sales growth in fiscal 2018.

The ETF was up nearly 2 percent Thursday.