An Inconvenient Divergence

Above is the three month comparison of the QQQQ's and the SOXX ****click image for full screen view ****

In the last three months the Semiconductor Index (SOXX) has been hammered while the Nasdaq-100 was flat. That is an unusual correlation. Sure, the SOXX is no longer the growth engine that it once was, but is it now the perfect hedge to Nasdaq-100?

The two major drags on the SOXX were Micron (MU) and Advanced Micro Devices (AMD). Micron is usually a story of dRAM prices and inventories; I don't claim to have a good perspective on either, except buying memory is always getting cheaper. AMD was just flying high two short years ago, with the stock over 40, and Ruiz seemed to have delivered the company out of the shadows of Intel. Finally, faster AMD chips were being accepted by Dell. Then Intel did what they always do to AMD, they dropped their prices and upped their R&D to beat them to the next generation chips.

A questionable acquisition of ATI by AMD also contributed to the valuation collapse. Three months ago AMD was at $13, but recently has been hovering around $7.

Is the whole index, including giants Intel and Applied Materials, destined to be a commoditized set of products which take the sizzle out of the steak? Even maturing companies have a few good moves left in them, like an aging athlete who still shows their stuff periodically.

Early in 2008 I plan to establish a ratio spread with long options on SOXX and relatively fewer short positions on QQQQ.