Semiconductor stocks are among the most important stocks to investors, as these stocks tend to confirm solid trends as well as potentially false trends in the stock market. Semiconductor stocks can sometimes lead the entire stock market by as many as several weeks, and warn of sharp reversals in the major stock indices. The predictive power of semiconductor stocks lies in the fact that semiconductor technology itself leads many other industries. This is simply because many consumer products such as cars, computers and everyday household products depend on the advances that semiconductors bring. Electronics has expanded in recent decades, so as to offer miniaturized products having full operational features, such as the ones we have seen recently, tablets, smart phones and the latest smart watches.

The semiconductor industry offers new chips for implementing very powerful software applications, and at a low cost.

This is where the micro controller chips come in. And it also offers new complex sensor and screen chip technologies for implementing new sensor features and user interfaces on all new devices, such as compass and acceleration sensors inside a smart phone, and the touch screen itself. All these require a different dedicated chip each, one which took many years to develop and put to the market. Most of these chips actually existed already for military applications (such as the accelerometer chip), but they were available at a very high cost. The semiconductor industry always steps in, improves design and makes a chip suitable for mass, low cost production so that manufactures can use it in every day consumer products.

As a result, a modern car can have as many as 170 dedicated micro controller chips in it, a smart phone can have all kinds of sensors, and an existing product such as an air-conditioning unit can use more energy-saving features, through sophisticated software running on these cheap micro controller and microprocessor chips. In fact in some cases, products that were almost obsolete and unable to compete in a saturated market, were literally reinvented through the use of new micro chips, and achieved new massive sales figures.

Investors and traders care about all these facts because they know that if semiconductor companies are working at hard pace, they are probably up to something. Whenever semiconductor stocks are rallying in a slow but solid way, they are about to release new exciting microchip solutions. These new microchips will improve existing consumer products, and the companies that manufacture all these products will achieve new sales, hence their stocks will also rise. Sometimes, in the case of dramatic scientific breakthrough, the entire economy will expand as a result, positively affecting stocks in almost every market sector.

Weekly Chart of the SP500 Index

Weekly chart of the SP500 index (above), versus the Philadelphia semiconductor index (below). The semiconductor index confirmed the entire rally in the stock market, but also hinted that stocks were due for a long term rally earlier on, through a series of higher lows. In other cases, there may be a divergence between stock indices and semiconductor stocks, if the divergence forms over a long period, it serves as a warning. Stock indices will end up moving in the direction that semiconductor stocks moved during the formation of the divergence.

Semiconductor stocks as seen through indices or through an individual company basis, can offer long term views on the stock market, and help investors assess their portfolios. Remember that all market sectors are affected one way or the other by economic activity, exports and consumer demand. And all of these factors depend on innovation down to chip level. Products are being improved every day at software level, this was made possible by micro controller and microprocessor chips, but there is always room for more improvement, such as adding more of these chips to an existing product. The operational precision of a product, energy saving, product size, battery life, all can improve thanks to the semiconductor industry.

It is also possible to invest in individual semiconductor companies, as long as a specific company is involved in some kind of proprietary technology that may achieve phenomenal success. These kinds of breakthroughs may not show on the semiconductor stock index, since the index only shows the entire industry and expectations about average, proven innovations but not world changing breakthroughs. Usually it is semiconductor companies involved in military R&D programs that achieve this kind of scientific breakthroughs. Technology is still behind in terms of accuracy and time keeping, in many fields of applied electronics. An atomic clock for example is well possible to make, but costs a fortune, has the size of a microwave oven and it is only used in satellites and top scientific equipment. If a chip comes along that can do the job just as accurately, at a fraction of size and cost, then the company that makes that chip will make billions.

Quantum Computing

Another exciting field is the field of quantum computing, any breakthroughs there will mean that new super powerful processors will be made possible. And hence computers of unimaginable computing power capable of cracking codes, speeding up the solution of scientific problems and so on, will reach consumers. This is a real example of a breakthrough of unimaginable economic value. This is where even small semiconductor companies can make billions and their investors could profit by a huge factor over just few years. In typical breakthroughs, it’s not uncommon for investors who invested just $10,000 to see their investment grow to over $1million in less than three years. This is the beauty of investing in such companies.

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