Hey traders,
It started with bond yields, and now credit's piling on too.
Junk bonds can't catch a bid (nobody's stepping up to buy them), and the private credit names (firms that lend outside the big banks) keep rolling over.
Small caps are trading like junk bonds, too.
Semiconductors keep shrugging the whole mess off. The VanEck Semiconductor ETF (SMH) was up again Friday, and it's been one of the strongest corners of the market this month.
The thing is, chips are part of the problem.
Broadcom (AVGO) is lining up a $60 billion financing package for AI chips, according to Bloomberg, and Blackstone (BX) is leading the riskiest piece of it. That's the same credit market that's starting to crack.
So I went looking for the chip names with a real reason behind the run.
I pulled up the space on my board and sorted the top and bottom of the semis and the software around them, hunting for names with news this week to back up the chart.
Two jumped out, one on each end.
The Tip I Sat On
A trader I respect flagged Synopsys (SNPS) to me at $410 about ten days ago. I listened, but I didn't act. His thesis was simple: in a gold rush, sell the shovels.
Every company designing a chip has to pay to use Synopsys software, no matter who wins the chip race. More companies designing their own chips means more licenses. He was right, and Wednesday night Synopsys put numbers on it.
At its investor day, the company guided next year's earnings to $19.04 to $19.12, well above the $17.81 the Street expected. It also signed deals with OpenAI and Amazon Web Services and announced a $1 billion buyback. The stock jumped double digits Thursday.
Before that, it had dropped about 20 percent this year on fears that AI would eat software companies alive. This week traders started sorting AI names into two buckets: threatened by AI or getting paid by it. Synopsys landed squarely in the second bucket.
It's been stuck in a range for more than a year, and every rally has died around $520 to $540. That's a solid target, with Thursday's low as my stop (the price where I admit I'm wrong and get out). This time, though, the company just raised the floor under its earnings.
Spinning Out
While I was looking at the winners, Western Digital (WDC) was heading the wrong way. SMH was up Friday and WDC was down hard. Seagate (STX) took an even bigger hit, which tells me the selling stayed inside the hard drive makers while the chip trade kept running.
The reason: Toshiba. According to Nikkei, the company plans to put about 60 billion yen, roughly $380 million, into doubling its hard drive capacity by fiscal 2027, aimed right at AI data centers. It wants to grow from just over 10 percent of the market to 30 percent.
Tight supply has been the whole reason Western Digital had pricing power (the ability to raise prices without losing customers). Since splitting off SanDisk, it's a pure hard drive company with nothing to cushion it.
WDC was a crowded winner, and it started cracking in August. It beat on earnings and still fell about 20 percent in a week because the bar sat too high.
Now somebody's adding supply at the top of the cycle.
Makes you think…
Are either one of these going to make the cut as the best trade of the week come Monday?
I genuinely don’t know. Complicating matters (while making them more exciting), Olivia Voz is going to special guest on Monday and give us a stock she loves and hates to add into the mix.
She treats her readers well. I know she’ll do the same for you.
Enjoy the Journey,
Tim