Wanna Play Semiconductor Stock Roulette?

Am I suggesting that trading or investing in semiconductors is akin to gambling? No, not at all. That said, perhaps more than any other industry group, trading or investing in semiconductors is dangerous, while offering the potential for a tremendous realization of equity risk premium.

High risk/high reward? Something like that. One has to learn to manage risk. One has to be hands-on. One cannot be pollyannaish concerning the likelihood of short, medium and long-term targets or goals.

If one is in the position where one must do something other than trade occupationally, thus focusing elsewhere during the predictive hours of the day, then that someone must have an increased tolerance for risk.

On Tuesday, the ugly stick was out and about. Both the Biden administration and presidential nominee Donald Trump were reported to have said things or indicated that they were thinking about things that could hurt semiconductor profitability or even availability. Biden had gone after foreign semiconductor equipment providers, while Trump had gone after Taiwan Semiconductor TSM, the world's dominant wafer foundry.

The group, quite overtly I might add, sold off, and sold off hard. The Van Eck Semiconductor ETF SMH gave up 7.12% on Wednesday as the Philadelphia Semiconductor Index surrendered 6.81% and the Dow Jones U.S. Semiconductor Index backed up 6.85%.

The five worst performers in the Nasdaq 100 for the day were all semiconductor designers or semiconductor equipment providers. ASML Holding ASML, Applied Materials AMAT, Advanced Micro Devices AMD, Marvell Technology MRVL and Lam Research LRCX all gave up more than 10% a piece on Wednesday. Interestingly, the top performer in the Nasdaq 100 was GlobalFoundries GFS, a U.S.-based foundry that was up 6.8%.

What I Did

I managed risk. I sold a portion of my Nvidia NVDA core long position and all of what was a smallish, long position in Micron Technology MU earlier in the day and tried to deploy that capital to another core long... AMD, based on the fact that (perhaps?) AMD might be closer to the bottom than those other two.

In order to cover my tail if I was wrong, I picked up some $118 NVDA calls expiring Friday, close to the end of the Wednesday trading session. That move, at least in the early going, looks to have been prudent.

That's Trading... What About Investing?

Well, Taiwan Semiconductor reported its second quarter this morning from Taipei. Of course, we have to convert everything from New Taiwan dollars to U.S. dollars, but after all that, TSM had a great quarter.

Revenue in USD came to $20.82 billion, beating expectations for $20.23 billion. The company also showed a healthy market for the high-end part of what it does. Demand for chips that are AI-capable or good for smartphones are on the rise and TSM increased its guidance for the current quarter to ballpark growth of 32%.

That's good for the companies that TSM manufactures for... like Nvidia, AMD, Marvell, Apple AAPL, Qualcomm QCOM and many others.

Stay out of semis altogether? Not me. I'll play the game. I'll manage my way through the rotation out of mega-cap tech and into small-caps. I'll even try to manage my way through the geopolitical labyrinth provided by two U.S. presidents looking to play hardball geopolitically.

My Take

One might be tempted to take lightly the Biden administration's hinted-at increase of export restrictions regarding China as there is reason to believe that even if a Democrat were to win the White House it might not be him. That said, I don't see Vice President Kamala Harris changing course on any Biden policies if she were to assume the mantle of leadership. I also see this particular policy idea as something that former President Trump could get behind if he were to win back his old job.

As for what Trump said about Taiwan, he's a dealmaker. He wants something and that was the opener. I think he knows that U.S. designers need TSM and that TSM is investing $65 billion on its own dough in three new fabs in Arizona with the help of some grant money. He's not going to push Taiwan Semi away, especially if they are willing to onshore their North American business and hire U.S. employees.

My Plan Going Forward

I will be long Nvidia NVDA as CEO Jensen Huang is the best in the biz and somehow is always one step ahead. I will be long AMD as CEO Lisa Su might be Huang's only challenger for the title. Remember where AMD was before Lisa Su climbed aboard? She's earned her spot on the Mt. Rushmore of tech CEOs.

I don't think you are wrong if you're in Marvell as they are going to, in my opinion, be number three in the data center and AI. I don't think you are wrong if you are in Qualcomm or Qorvo as the next smartphone upgrade cycle is likely to be a doozy.

Oh, and though I sold the shares Wednesday, I do realize that I need to be long some memory if I am long the AI trade and Micron is miles ahead of Western Digital WDC or Seagate Technology STX.

3 Questions on Nvidia

Is Nvidia trading lower coming out of a double-top bearish reversal?

Is Nvidia building a double-bottom bullish reversal at the 38.2% Fibonacci retracement level of the April through June run?

Is Nvidia going to develop a basing period of consolidation (likely?) between that $141 top and that $118 support?

More from TheStreet Pro

At the time of publication, Guilfoyle was long NVDA and AMD equity; and long NVDA calls.