A Crucial Part of Tech Rallied the Moment FANG Started Cratering

(Bloomberg) -- Semiconductor stocks continue to be a bright spot in an earnings season that has taken its toll on technology investors.

KLA-Tencor Corp. led the group higher Tuesday, climbing as much as 15 percent for the biggest gain in almost three years, after its fourth-quarter results topped the highest expectations. The report echoed a theme of strong demand just days after heavyweights like Advanced Micro Devices Inc. and Xilinx Inc. crushed expectations.

The strength in chip stocks has been magnified as tech investors slammed the sell button for tech darlings in the FANG bloc. The megacap group has stumbled through a rocky earnings season that pushed the FANG Index down 9.3 percent over a three-day slump following Facebook Inc.’s record meltdown. The Philadelphia Semiconductor Index jumped 1.9 percent Thursday, defying the Facebook-led rout, and added another 1.3 percent on Tuesday.

A Crucial Part of Tech Rallied the Moment FANG Started Cratering

KLA-Tencor’s strength comes after months of underperformance from semiconductor equipment stocks, a group that has been mostly excluded from optimism about the broader chip sector.

“The semi equipment sector has been volatile since beginning of 2018 due to memory capex volatility concerns,” Berenberg analyst Tammy Qiu wrote in a note to clients. “The key question in the sector is about whether we will see a recovery in the December quarter, which would alleviate the street’s fears about a potential semi cycle collapse.”

The broader semiconductor sector has displayed “excellent relative strength” over the past month while Intel Corp., the largest U.S. chipmaker, is showing evidence of “textbook downside exhaustion,” Evercore ISI technical analyst Rich Ross wrote in a research note on Tuesday. He advised clients to buy both.

The next catalyst for chip stocks will be Apple Inc.’s third-quarter results after the close of trading. Analysts are looking for 41.6 million iPhone units in the quarter, along with an average selling price of $699, according to estimates compiled by Bloomberg News. Apple’s outlook will be viewed as an indicator of future growth for suppliers including Qorvo Inc., Cirrus Logic Inc. and Broadcom Inc.

©2018 Bloomberg L.P.