Michael Santoli, a wonderful journalist at Barrons, noted the observations of one of the strategists at Credit Suisse about the relationship between The Software Holders ETF (SWH) and the semiconductor Holders ETF (SMH). Here is the meat of what he wrote:
"The quantitative and derivatives strategists at Credit Suisse took note last week of the severe outperformance of software versus semiconductors in the past nine months. The Software HOLDRS exchange-traded fund (SWH) has outperformed the Semiconductor HOLDRS (SMH) by 25 percentage points since spring. In the past five years, these ETFs have had an 80% correlation, but with wide swings in relative performance over shorter periods.
The CS researchers were recommending buying the SMH and shorting the SWH to play a reversion to the sectors' average relationship over the next eight to 12 months. These swings can always go farther than expected, but the current divergence is nearing extremes hit only twice in the past five years, after which it reversed dramatically.
There are reasons to explain the latest trouncing of semis by software, including the revival of Microsoft (MSFT) shares, the continued monopoly franchises in software contrasting with stiff competition in semis, and the attractiveness of software to private-equity buyers.
But, for traders willing to bet that this rubber band will retract rather than snap, the time might be right."
I have been long the SMH for a while and wrote about it a few points lower and I agree that the SMH does look good here relative to the SWH. In addition, the other chart comparing the QQQQ to the SMH also shows how lousy the semis have done in relation to the overall NAZ, so another reason it may be time to buy.