STM and LRCX just pulled back to trendlines with historically bullish implications
Several chip stocks are lower today, after Japan-based Renesas Electronics issued partial production cuts to counter slowing Chinese demand. Two such names in the red today are STMicroelectronics NV (NYSE:STM) and Lam Research Corporation (NASDAQ:LRCX). However, if history is any guide, both semiconductor stocks could be headed for a quick bounce.
More specifically, STM is trading near its 40-day moving average. The previous five times the stock tested support at this moving average after a lengthy stretch above it, the stock averaged a one-month gain of 11.95%, with 100% of the returns positive, according to Schaeffer's Senior Quantitative Analyst Rocky White.
At last check, STM was down 2.3% to trade at $15.63, so a pop of similar magnitude would put it back up above $17.50, territory not topped on a closing basis since early October. The chip stock closed out 2018 in an ugly channel of lower lows -- bottoming at a two-year low of $12.00 on Jan. 3 -- but is up 15% so far in 2019.
In the options pits, calls are almost exclusively in favor, though absolute volume is light. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 1,019 calls in the last 10 sessions, compared to just 88 puts.
Looking at Lam Research, the chip stock also recently pulled back to its 40-day trendline. According to White, the last 10 times LRCX has come within one standard deviation of this moving average after trading above it for an extended period, the stock averaged a one-month gain of 7.4%, with all of the returns positive. From the stock's current perch, down 1% at $167.59, a similar gain would have LRCX back above $180.
Calls are also hot in LRCX's options pits. ISE/CBOE/PHLX data shows the security with a 10-day call/put volume ratio of 2.83, which ranks in the 95th percentile of its annual range. Echoing this, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.63 lands in the 9th percentile of its annual range. In other words, near-term options traders are more call-biased than usual right now.