Trading Nation

One group of tech stocks could be key to the next leg of the market rally

Chips beat market weakness—traders on how to play the semiconductor stocks

Chipmakers are starting to play catch up.

After lagging the tech rally for the year, the semiconductors space bucked broader market weakness on Thursday to head higher. The SMH semiconductor ETF is up nearly 5% this week, better than the 3% increase for the XLK technology ETF.

"The semiconductor group overall has been clearly a leader. Back in 2018, they gave us a nice warning signal in advance of the late year sell-off there," said Matt Maley, chief market strategist at Miller Tabak, on CNBC's "Trading Nation" on Thursday. "And then it rallied twice as much as the rest of the market the first half of last year, and then led the whole market higher in the first two months of the rebound in March."

Since March, he added, its rise has slowed and it was underperforming through May and June. However, this week's breakout where the SMH ETF made a "higher high" looks "very bullish," Maley said.

"This is kind of showing that the tech rally is starting to broaden out a little bit. If that can continue, I think it's going to be very good for the overall market as well," he said.

Gina Sanchez, CEO of Chantico Global, said the Covid crisis has shined a spotlight on the importance of technology, a trend she sees continuing.

"The trend towards remote working, the revamping and revisiting of business continuity plans, the push towards 5G, all of that has played into the hands of semis stocks," Sanchez said during the same "Trading Nation" segment. "The continued reliance on technology also helps."

The SMH ETF is up more than 30% over the past three months. Nvidia, ON Semiconductor and Marvell Technology are among the top performers.

"These trends, by the way, aren't going to end with Covid. So, I think that this is a broader trend that can last a long time," Sanchez said.