Chart Master: Software-semis pair trade?

Key Concepts

• IGV: iShares Expanded Tech-Software Sector ETF
• SOCS: (Likely referring to Semiconductor stocks collectively, though not explicitly defined in the transcript)
• SEMIS: Semiconductor stocks (specifically Micron - MU is mentioned)
• Tech Sector (XLK): The broader technology sector as represented by a market ETF.
• Comparative Charting: Analyzing the performance of different sectors/ETFs relative to each other and a broader index.
• Spread Analysis: Examining the difference in performance between two assets or sectors.
• Parts & Whole Principle: The idea that the performance of individual components (SEMIS & Software) influences the performance of the overall sector (Tech).

Divergence in Tech Sector Performance: Semiconductors vs. Software

The discussion centers on a significant divergence in performance within the technology sector, specifically between semiconductor stocks (SEMIS) and software stocks (represented by IGV). While the overall tech sector has shown growth, semiconductors have dramatically outperformed software over the past one, two, and three years. The speaker, Carter Wirth, initially recommended selling IGV but now suggests a short-term reversal, not due to a change in fundamental outlook on IGV itself, but due to the extreme relationship between its performance and that of semiconductors. He reiterates a continued underweight position on tech, particularly in the software area.

Performance Disparity: Quantitative Data

The analysis relies heavily on comparative charts illustrating the performance differences. Specific figures presented include:

• One-Year Chart: SEMIS are significantly outpacing software, with the tech sector (the “whole”) positioned in between.
• Two-Year Chart: SEMIS are up 73%, while software is up only 14%. The tech sector’s performance falls between these two.
• Three-Year Chart: SEMIS have increased by 170%, more than doubling the performance of software. Again, the tech sector’s performance is intermediate.

These figures demonstrate a widening gap in performance, indicating a strong divergence in market sentiment and growth trajectories. Micron (MU) is specifically cited as an example of a semiconductor stock performing well.

The “Parts & Whole” Framework & Spread Analysis

Wirth employs the principle that “the parts compose the whole, and the whole comprises the parts” to explain the situation. He uses comparative charts to visually represent this relationship. By holding the “whole” (the tech sector) constant on the final chart, the disparity between the two “parts” (SEMIS and software) becomes even more pronounced. This highlights the extreme divergence in their performance. The focus is on analyzing the spread – the difference in performance – between these two components.

Trading Strategy & Underlying Judgement

Despite the short-term potential reversal suggested for IGV, Wirth emphasizes that the underlying judgement regarding IGV remains negative. He states, “We don’t like IGV. We think IGV is going lower.” The change in tactical approach is driven by the extreme relationship between IGV and SEMIS, suggesting a potential for a temporary bounce based on sector dynamics rather than a fundamental shift in the outlook for software. He stresses that “each trade is on its own,” but acknowledges the influence of broader sector trends.

Notable Quote

“The principle. The parts composed the whole. The whole comprises the parts.” – Carter Wirth, emphasizing the analytical framework used to understand the tech sector’s performance.

Conclusion

The core takeaway is that while the tech sector as a whole has performed well, a significant divergence exists between semiconductors and software. Semiconductors have dramatically outperformed software, creating an unusual spread. This disparity, while not changing the fundamental bearish outlook on software, presents a short-term trading opportunity. The analysis underscores the importance of understanding the relationship between individual components and the overall sector, and utilizing comparative charting and spread analysis to identify potential market movements.