Chip stocks are ‘vulnerable’ as tariff talk rages on, but they may recover

Semiconductor stocks used to be a lot hotter.

The popular SMH semiconductor-tracking ETF enjoyed a 36 percent rally last year, spending much of that time above its 200-day moving average as high-flyers like Nvidia, Micron and Applied Materials surged. The group has fallen out of favor as of late, now down 6 percent from its 2018 high.

The SMH fell Monday for a third straight session, led to the downside by Micron, which has lost nearly 6 percent in the last week alone. Morgan Stanley equity analysts wrote in a note to clients Monday morning that while “cyclical conditions remain amplified, tariff uncertainty represents a potential risk to demand that could lead to an inventory unwind and correction in stocks.”

Still, some market strategists say that while the chips have been mired in international tariff disputes, they may bounce back due to sustained demand for cloud technology and other devices and software for which semiconductors can be essential.

The semiconductors are “obviously vulnerable because it’s right in the center of some of these tariffs. But if you look at the long-term outlook, even despite the short-term tariff outlook, you’re still looking at a very, very strong outlook for demand,” Gina Sanchez, CEO of Chantico Global, said Monday on CNBC’s “Trading Nation.”

“You’re looking at the continuation of cloud computing, the ‘Internet of things,’ auto computing, all of those things are going to continue to build demand and I think that’s really what’s been priced into these stocks. So while this is a short-term disruption, I would actually say maybe go for a better-priced growth,” Sanchez said, adding that a stock like Applied Materials, firmly in a bear market and “more vulnerable on a technical basis,” is one of the cheapest chip plays at this juncture if investors wanted exposure to longer-term trends driving semiconductors.

On a technical basis, the group would have to “break down further from here” to raise real concerns, said Matt Maley, equity strategist at Miller Tabak. Semiconductors are still above their key support levels, he added Monday on CNBC’s “Trading Nation.”

One name that looks particularly vulnerable to Maley here is Applied Materials, which is trading near the bottom line of a so-called descending triangle formation on the chart.

If the stock breaks down below the $45 level in any meaningful way, Maley said that’s going to be quite negative.

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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.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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