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ARA Research
ARA (April’16)- © 2016 -
ARA Research
Philadelphia Semiconductor
Sector (SOX) Index Analysis
A.R. Alvarez
Apr...
Semiconductors
ARA (April’16)- © 2016 - 2
ARA Research
SOX Index Analysis – What’s New
 Data Updated to March 31, 2016
 ...
Semiconductors
ARA (April’16)- © 2016 - 3
ARA Research
SOX Index Analysis Outline
 SOX Index History 4 - 12
 SOX Index v...
Semiconductors
ARA (April’16)- © 2016 - 4
ARA Research
SOX Index History
ARA ResearchARA Research
Semiconductors
ARA (April’16)- © 2016 - 5
ARA Research
SOX Index Companies
 SOX Established Dec 1993; Options Trading
Sta...
Semiconductors
ARA (April’16)- © 2016 - 6
ARA Research
SOX Index Employs Algorithm to Limit Contribution of Largest Market...
Semiconductors
ARA (April’16)- © 2016 - 7
ARA Research
SOX Index Cycles
SOX Index Has Exhibited 8 Cycles (Defined as ±30%)...
Semiconductors
ARA (April’16)- © 2016 - 8
ARA Research
SOX Index Cycle Min-Max
The Median “Up” Cycle was 123% vs. a Median...
Semiconductors
ARA (April’16)- © 2016 - 9
ARA Research
SOX Index Cycle Lengths
The Median “Up” Cycle Length was 19 Mths vs...
Semiconductors
ARA (April’16)- © 2016 - 10
ARA Research
SOX Index vs. Semi Revenue
SOX Has Historically Served as Leading ...
Semiconductors
ARA (April’16)- © 2016 - 11
ARA Research
SOX / Semi Sales Ratio
Avg Std Dev
1995 - 1999 26 9
2000 - 2004 39...
Semiconductors
ARA (April’16)- © 2016 - 12
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SOX Index Summary
 Eight “Up-Down” and 2 “Sideways” Cycles; Curre...
Semiconductors
ARA (April’16)- © 2016 - 13
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SOX Index:
U.S. Recessions
ARA ResearchARA Research
Semiconductors
ARA (April’16)- © 2016 - 14
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SOX Index vs. U.S. Recession
NBER* Recessions
in Grey
SOX Index Ha...
Semiconductors
ARA (April’16)- © 2016 - 15
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SOX Index Off-Peak Chart
NBER Recessions
in Grey
SOX “Off-Peak” Ch...
Semiconductors
ARA (April’16)- © 2016 - 16
ARA Research
NBER Recessions
in Grey
SOX Index Off-Peak Since 2001
SOX “Off-Pea...
Semiconductors
ARA (April’16)- © 2016 - 17
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SOX vs. Recession Summary
 SOX Has Experienced Significant Drops ...
Semiconductors
ARA (April’16)- © 2016 - 18
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SOX Index
Benchmarks
ARA ResearchARA Research
Semiconductors
ARA (April’16)- © 2016 - 19
ARA Research
Through March 31, 2016
SOX Index Behavior “Mimics” S&P 500 and NAS...
Semiconductors
ARA (April’16)- © 2016 - 20
ARA Research
SOX Correlation to NASDAQ
1994 - 2016 2001 - 2016 2006 - 2016
0.59...
Semiconductors
ARA (April’16)- © 2016 - 21
ARA Research
SOX Correlation to S&P500
Regression Coefficient (R2)
1994 - 2016 ...
Semiconductors
ARA (April’16)- © 2016 - 22
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$1,000 Becomes*:
Benchmark Performance: B&H
End Mar'16
S&P $4,560
...
Semiconductors
ARA (April’16)- © 2016 - 23
ARA Research
SOX Index Relative Performance
vs. NASDAQ: SOX Performance General...
Semiconductors
ARA (April’16)- © 2016 - 24
ARA Research
SOX Index Relative Performance
vs. NASDAQ: SOX Annualized Volatili...
Semiconductors
ARA (April’16)- © 2016 - 25
ARA Research
SOX Index Relative Performance
NASDAQ, S&P 500 and Dow Indices His...
Semiconductors
ARA (April’16)- © 2016 - 26
ARA Research
Indices Comparison Summary
 Over The Past 10 Years The SOX Has Ex...
Semiconductors
ARA (April’16)- © 2016 - 27
ARA Research
SOX Index
Momentum Analysis
ARA ResearchARA Research
Semiconductors
ARA (April’16)- © 2016 - 28
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SOX Index Momentum
 Objective:
 Determine if Simple Momentum Rul...
Semiconductors
ARA (April’16)- © 2016 - 29
ARA Research
Momentum Calculations
 Daily and End of Month Market Close Calcul...
Semiconductors
ARA (April’16)- © 2016 - 30
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Momentum Summary: 1st Rule
 A Momentum-Based Trading Rule Can Yie...
Semiconductors
ARA (April’16)- © 2016 - 31
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SOX B&H vs. Mtm 3 Mth Lookback
B&H Taxed No Tax
$1,000 Becomes $4,...
Semiconductors
ARA (April’16)- © 2016 - 32
ARA Research
SOX B&H vs. Mtm 6 Mth Lookback
B&H Taxed No Tax
$1,000 Becomes $4,...
Semiconductors
ARA (April’16)- © 2016 - 33
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SOX B&H vs. Mtm 12 Mth Lookback
B&H Taxed No Tax
$1,000 Becomes $4...
Semiconductors
ARA (April’16)- © 2016 - 34
ARA Research
SOX Index & 200 Day SMA
Through March 31, 2016
Semiconductors
ARA (April’16)- © 2016 - 35
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B&H vs. 200 Day SMA Lookback
Through March 31, 2016
B&H Taxed No T...
Semiconductors
ARA (April’16)- © 2016 - 36
ARA Research
Impact of Non-Zero Threshold
Criteria: 6 Mth Look Price ≥ 2.5% Hig...
Semiconductors
ARA (April’16)- © 2016 - 37
ARA Research
A Closer Look at 3 Mth Lookback
Through March 31, 2016
Semiconductors
ARA (April’16)- © 2016 - 38
ARA Research
Where Are We So Far?
 Compared to “Buy & Hold” Investing No Reall...
Semiconductors
ARA (April’16)- © 2016 - 39
ARA Research
Momentum Summary: 2nd Rule
 Applying Recession Filter (Use Mtm Ru...
Semiconductors
ARA (April’16)- © 2016 - 40
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Momentum Rule Only in Recession
Criteria: 200 Day SMA Applied Only...
Semiconductors
ARA (April’16)- © 2016 - 41
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Momentum: Always vs. Recession
Criteria: 200 Day SMA – Res = Momen...
Semiconductors
ARA (April’16)- © 2016 - 42
ARA Research
Appendix:
Background Information
ARA ResearchARA Research
Semiconductors
ARA (April’16)- © 2016 - 43
ARA Research
WW Semiconductor Sales
Growth Rate Drop From Historical 15% CAGR t...
Semiconductors
ARA (April’16)- © 2016 - 44
ARA Research
NASDAQ Correlation to S&P500
Regression Coefficient (R2)
1994 - 20...
Semiconductors
ARA (April’16)- © 2016 - 45
ARA Research
SOX Index Summary
 PHLX Semiconductor Sector Index is a Modified ...
Semiconductors
ARA (April’16)- © 2016 - 46
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SOX Index Calculation
 Value of Index Equals Aggregate Value of I...
Semiconductors
ARA (April’16)- © 2016 - 47
ARA Research
SOX Index Companies 2013 - 15
Ticker Name
Weight
(%)
Index
MMC
($B...
Semiconductors
ARA (April’16)- © 2016 - 48
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SOX Index Sept vs. Oct 2010
 SOX Index Transitioned to
Modified M...
Semiconductors
ARA (April’16)- © 2016 - 49
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SOX Index Cycles Table
Median Min Max
Up 123% 50% 496%
Down -57% -...
Semiconductors
ARA (April’16)- © 2016 - 50
ARA Research
Index Volatility
 Basic Definition:
 Standard Deviation of Histo...
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Semiconductor Index (SOX) Analysis Updated

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I updated an analysis that I did of the Philadelphia Semiconductor Stock Index (SOX) performance that I had done November 2105. The first part of the analysis provides a historical perspective and some simple analytics. The second part compares the SOX to standard benchmarks such as the S&P 500. The final section compares a simple momentum rule to a "Buy and Hold" investment strategy in the SOX. This analysis adds: 1) a section on how the SOX performs wrt recessions , 2) correlation analysis between the SOX and the NASDAQ and S&P 500, and 3) the use of a recession filter when applying momentum. Results are also updated as of March 31, 2016.

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Semiconductor Index (SOX) Analysis Updated

  1. 1. ARA Research ARA (April’16)- © 2016 - ARA Research Philadelphia Semiconductor Sector (SOX) Index Analysis A.R. Alvarez April 2016
  2. 2. Semiconductors ARA (April’16)- © 2016 - 2 ARA Research SOX Index Analysis – What’s New  Data Updated to March 31, 2016  SOX Index vs. U.S. Recessions 13 -17  Correlation to NASDAQ / S&P500 20 - 21  Adding Recession Filter to SOX 38 - 41 Momentum Investing
  3. 3. Semiconductors ARA (April’16)- © 2016 - 3 ARA Research SOX Index Analysis Outline  SOX Index History 4 - 12  SOX Index vs. U.S. Recessions 13 - 17  SOX Index vs. U.S. Benchmarks 18 - 26  SOX Index Momentum Analysis 27 - 41  Appendix: SOX Background 42 - 50
  4. 4. Semiconductors ARA (April’16)- © 2016 - 4 ARA Research SOX Index History ARA ResearchARA Research
  5. 5. Semiconductors ARA (April’16)- © 2016 - 5 ARA Research SOX Index Companies  SOX Established Dec 1993; Options Trading Started Sept 1994; Split 2:1 July 1995  Top 30 Semi Companies By Market Cap  Of 16 Companies on Index Sept 1994:  Eight Still on Index (ADI, AMAT, CY, IDTI, INTC, MU, TER, TXN)  Five Were Bought (IRF, LSI, MOT, NVLS, NSM); Acquiring Company on Index  Three Dropped Off (AMD, LSCC, VLSI)  Index Weight Limited to ~8%; Limits Impact of Larger Market Cap Companies (Broadcom / Avago a Temporary Exception)  Market vs. Index Modified Market Cap  Aggregate MC ~$750B vs. Index MMC~$450B  Max Company MC: Intel $151B vs. ~$35B Index MMC; Similar to TI Which Has MC of ~$59B)  Median Index MMC ~$15B, Market Cap ~$11B (Maxim)  Min Semi Company Market Cap Si Labs ~$1.9B Note: Green Highlights companies added since Oct’15 (replace Atmel, KLA-Tencor, and Sandisk) Ticker Name Weight (%) Index MMC ($B) Market Cap ($B) ADI Analog Devices, Inc. 4.0 $18 $18 AMAT Applied Materials, Inc. 4.0 $18 $24 ARMH ARM Holdings plc 1.4 $6.2 $19 ASML ASML Holding NV 1.8 $8.2 $41 AVGO Broadcom (Avago) 11.6 $52 $59 CAVM Cavium, Inc. 1.0 $4.7 $3.2 CY Cypress Semiconductor 0.9 $4.2 $2.6 IDTI Integrated Device Tech 0.9 $4.0 $2.7 INFN Infinera Corporation 0.7 $3.1 $2.1 INTC Intel Corporation 7.8 $35 $151 LLTC Linear Technology Corp 3.6 $16 $11 LRCX Lam Research Corp 4.1 $18 $13 MCHP Microchip Technology Inc. 3.3 $15 $11 MPWR Monolithic Power Systems 0.8 $3.8 $2.5 MRVL Marvell Technology Group 1.7 $7.5 $5.1 MSCC Microsemi Corporation 1.4 $6.2 $4.1 MU Micron Technology, Inc. 3.6 $16 $11 MXIM Maxim Integrated Products 3.4 $15 $11 NVDA NVIDIA Corporation 4.2 $19 $20 NXPI NXP Semiconductors NV 4.3 $19 $29 ON ON Semiconductor 1.3 $6.0 $4.1 QCOM Qualcomm Incorporated 7.4 $33 $77 QRVO Qorvo, Inc. 2.1 $9.3 $5.9 SLAB Silicon Labs 0.5 $2.4 $1.9 SUNE SunEdison, Inc. 0.0 $0.2 $0.2 SWKS Skyworks Solutions Inc. 3.9 $18 $14 TER Teradyne Inc. 1.4 $6.2 $4.2 TSM Taiwan Semiconductor Mfg 7.2 $32 $130 TXN Texas Instruments Inc. 8.0 $36 $59 XLNX Xilinx Inc. 3.5 $16 $12 Market Close April'20 2016 1.0 $450 $747
  6. 6. Semiconductors ARA (April’16)- © 2016 - 6 ARA Research SOX Index Employs Algorithm to Limit Contribution of Largest Market Cap Companies; Balances Bi-Modal Nature of Market Cap SOX Company Market Caps Market Cap of Companies in SOX ($B) Data as of April 20, 2016
  7. 7. Semiconductors ARA (April’16)- © 2016 - 7 ARA Research SOX Index Cycles SOX Index Has Exhibited 8 Cycles (Defined as ±30%) Since Inception Through March 31, 2016
  8. 8. Semiconductors ARA (April’16)- © 2016 - 8 ARA Research SOX Index Cycle Min-Max The Median “Up” Cycle was 123% vs. a Median “Down” Cycle of -57%, But The Distribution Was Bi-Modal, Consistent with the SOX’s Relatively High Volatility Median Min Max Up 123% 50% 496% Down -57% -69% -22% Neutral 3% -4% 9%
  9. 9. Semiconductors ARA (April’16)- © 2016 - 9 ARA Research SOX Index Cycle Lengths The Median “Up” Cycle Length was 19 Mths vs. a Median “Down” Cycle Length of 10 Mths Median Min Max Up 19 6 30 Down 10 7 17 Neutral 14 11 17
  10. 10. Semiconductors ARA (April’16)- © 2016 - 10 ARA Research SOX Index vs. Semi Revenue SOX Has Historically Served as Leading Indicator for Semi Revenue Through March 31, 2016
  11. 11. Semiconductors ARA (April’16)- © 2016 - 11 ARA Research SOX / Semi Sales Ratio Avg Std Dev 1995 - 1999 26 9 2000 - 2004 39 16 2001 - 2009 20 4 2010 - 2014 18 3 1995 - 2016 25 12 SOX / Semi Sales Ratio ~20 Over Past 10+ Years Through March 31, 2016
  12. 12. Semiconductors ARA (April’16)- © 2016 - 12 ARA Research SOX Index Summary  Eight “Up-Down” and 2 “Sideways” Cycles; Currently in Early Phase of a “Down” or “Sideways” Cycle; Down ~10% From Previous Peak  Peaked During “Internet” Bubble of 1999 & 2000; Still Trades at ~50% of 2000 Peak, Even Though Has Had a Steady Rise From 2008 Financial Crises  Fairly Extreme Movements Either Up (>100%) or Down (> -75%) Over Relatively Short Periods  Median Up-Cycle Gain (123%) Was ~2X The Median Down-Cycle  Median Up-Cycle Length (~20 Mths) Was ~2X Median Down- Cycle, So Relative Slope (~6.5% Per Month) Was Same For Both Portions  Setting Aside Two Neutral Cycles, Only One Cycle Was Less Than ±30%; The Down-Cycle From June to Dec 2011 Which Only Dropped ~22%  SOX Index Tends to Lead Semi Revenue By a Few Months on Down-Cycles, But is Coincident With Semi Revenue Increases on Up-Cycles  The Most Recent Cycle is an Exception Where Semi Revenue Declined Well Before the SOX Index Started to Drop (Due to Heavy 2015 M&A ?)
  13. 13. Semiconductors ARA (April’16)- © 2016 - 13 ARA Research SOX Index: U.S. Recessions ARA ResearchARA Research
  14. 14. Semiconductors ARA (April’16)- © 2016 - 14 ARA Research SOX Index vs. U.S. Recession NBER* Recessions in Grey SOX Index Has Exhibited Significant Drops Outside of Recession Periods Through March 31, 2016 * National Bureau of Economic Research
  15. 15. Semiconductors ARA (April’16)- © 2016 - 15 ARA Research SOX Index Off-Peak Chart NBER Recessions in Grey SOX “Off-Peak” Chart Since Index Inception Highlights 2000 Falloff Through March 31, 2016
  16. 16. Semiconductors ARA (April’16)- © 2016 - 16 ARA Research NBER Recessions in Grey SOX Index Off-Peak Since 2001 SOX “Off-Peak” Chart Since 2001 Eliminates the Impact of the 2000 Run- Up & More Clearly Shows Current Index Dynamics Through March 31, 2016
  17. 17. Semiconductors ARA (April’16)- © 2016 - 17 ARA Research SOX vs. Recession Summary  SOX Has Experienced Significant Drops Outside of Recession Boundaries  8 Cycles with >30% Drop Identified Since Index Inception  Index Period Encompassed 2 Recessions  2001 Recession: The SOX Exhibited Behavior Specific to Dynamics of Its Market Segment (Technology)  ~ 1 Year Before Recession Start the SOX Had Major Drop; Also Exhibited By Tech Heavy NASDAQ  Precipitated by Telecom & Dot Com ‘Bubble’  As Percentage of Peak, SOX Lost More Value Prior to Recession Than After Start of Recession; Not Typical of Other Indices/Recessions  2008 Recession: The SOX Behaved in a Manner Similar to Other Major US Indices; i.e. If Total Drop From Previous Recent Peak = 100%:  ~33% Drop Before Recession Start  ~67% Drop After Recession Start  Recovery Starts Well Before Recession End  Given SOX’s High Correlation to Major US Indices (Pg. 20 & 21), It is Likely to Exhibit Behavior More Like 2008 than 2001 in Next Recession
  18. 18. Semiconductors ARA (April’16)- © 2016 - 18 ARA Research SOX Index Benchmarks ARA ResearchARA Research
  19. 19. Semiconductors ARA (April’16)- © 2016 - 19 ARA Research Through March 31, 2016 SOX Index Behavior “Mimics” S&P 500 and NASDAQ – How Well? SOX Index vs. S&P500 & NASDAQ
  20. 20. Semiconductors ARA (April’16)- © 2016 - 20 ARA Research SOX Correlation to NASDAQ 1994 - 2016 2001 - 2016 2006 - 2016 0.59 0.48 0.79 Regression Coefficient (R2) During Past 10 Years SOX & NASDAQ Have Become Highly Correlated
  21. 21. Semiconductors ARA (April’16)- © 2016 - 21 ARA Research SOX Correlation to S&P500 Regression Coefficient (R2) 1994 - 2016 2001 - 2016 2006 - 2016 0.5 0.58 0.89 During Past 10 Years SOX & S&P500 Have Become Highly Correlated
  22. 22. Semiconductors ARA (April’16)- © 2016 - 22 ARA Research $1,000 Becomes*: Benchmark Performance: B&H End Mar'16 S&P $4,560 Russell $4,378 DJI $4,783 NASDAQ $6,578 SOX $5,690 * Since SOX Inception Through March 31, 2016
  23. 23. Semiconductors ARA (April’16)- © 2016 - 23 ARA Research SOX Index Relative Performance vs. NASDAQ: SOX Performance Generally Worse in any Given 5 Year Period; Worse Overall vs. S&P500: SOX Performance Better in “Good” 5 Year Periods & Worse in “Bad” 5 Year; Slightly Better Overall Similar Performance For All 5 Indices in Last 5 Year Period CAGR CAGR S&P500 Dow R2000 NASDAQ SOX 1995 - 1999 25% 26% 14% 38% 36% 2000 - 2004 -3.5% 1% 5% -12% -11% 2005 - 2009 -1.2% 2.4% -0.2% 1.4% -3.0% 2010 - 2014 13% 14% 13% 16% 14% 1995 - 2016 7.2% 7.3% 7.2% 9.3% 7.5% Note: Through End March’16
  24. 24. Semiconductors ARA (April’16)- © 2016 - 24 ARA Research SOX Index Relative Performance vs. NASDAQ: SOX Annualized Volatility ~50% Higher, Decreasing Modestly (From 1.9X to 1.4X) Over Time vs. S&P500: SOX Annualized Volatility ~2x Higher, Decreasing Significantly (From 2.5X to 1.6X) Over Time Annualized Volatility Volatility S&P500 Dow R2000 NASDAQ SOX 1995 - 1999 16% 16% 14% 21% 40% 2000 - 2004 20% 20% 23% 35% 57% 2005 - 2009 24% 22% 30% 25% 32% 2010 - 2014 16% 15% 22% 18% 25% 1995 - 2016 19% 18% 22% 25% 39% Note: Through End March’16
  25. 25. Semiconductors ARA (April’16)- © 2016 - 25 ARA Research SOX Index Relative Performance NASDAQ, S&P 500 and Dow Indices Historical Risk Adjusted Return (CAGR/Volatility) All ~2X Better Than SOX For the Most Recent 5 Years (Since March 2016) The Difference in Risk Adjusted Return Has Narrowed Such That the NASDAQ, S&P 500 and Dow Indices Are ‘Only’ 1.5 Better Than SOX CAGR /Annualized Volatility CAGR/Volatility S&P500 Dow R2000 NASDAQ SOX 1995 - 1999 1.6 1.7 1.0 1.8 0.9 2000 - 2004 -0.2 0.0 0.2 -0.3 -0.2 2005 - 2009 -0.1 0.1 0.0 0.1 -0.1 2010 - 2014 0.8 1.0 0.6 0.9 0.6 1995 - 2016 0.4 0.4 0.3 0.4 0.2
  26. 26. Semiconductors ARA (April’16)- © 2016 - 26 ARA Research Indices Comparison Summary  Over The Past 10 Years The SOX Has Exhibited Relatively High Correlation to the NASDAQ (R2 ~0.8) and S&P500 (R2 ~0.9); Prior to That Not So Much  For The Period 1995 – March 2016, The NASDAQ, SOX, and S&P500 CAGR was 9.3%, 7.5%, & 7.2% With a Volatility of 25%, 39%, & 19% Respectively  SOX Relative Risk (CAGR/Volatility) Was Worse Than NASDAQ or S&P500  Individual 5 Year Periods For Most Part Exhibit Similar Relative Results  $1,000 Invested in Each of the 5 Indices Since May 1994 Grow to ~$6,600, ~$5,700, ~$4,400 to ~$4,800 (Excluding Dividends) March 2016 For NASDAQ, SOX, DJI / Russell 2000/S&P500 Respectively  Whereas The Four Benchmark Indices are Currently Above or Close to Their All Time High, The SOX is at ~50% of It’s 2000 Peak  If One Were Unlucky Enough to Have Invested at or Near The SOX Peak in 2000, They Would Still Have Lost ~50% of The Investment as of March 2016  The SOX Has Exceeded Its Pre-2008 Financial Crises ‘Peak’, But It Took 6 Years to Recover 
  27. 27. Semiconductors ARA (April’16)- © 2016 - 27 ARA Research SOX Index Momentum Analysis ARA ResearchARA Research
  28. 28. Semiconductors ARA (April’16)- © 2016 - 28 ARA Research SOX Index Momentum  Objective:  Determine if Simple Momentum Rules Can Be Utilized on the SOX Index to Obtain a Better Return Than a “Buy & Hold” Strategy  Two Distinct Momentum Rules Utilized  First Momentum Rule (Momentum Always “On”):  Conventional Use of Momentum  Buy on Positive Momentum: “Current” Price > Lookback Period Price  Sell on Negative Momentum: “Current” Price < Lookback Period Price  Second Momentum Rule (Momentum “On” Only During Recession):  Growth Trend Timing: http://www.philosophicaleconomics.com/2016/01/gtt/  Use Conference Board Co-Incident Composite Indicator (or Your Favorite Recession Indicator(s) ) to Determine Whether In or Out of Recession  Outside Recession: Buy on Positive Momentum or Stay Invested (B&H)  Inside Recession: Apply First Momentum Rule
  29. 29. Semiconductors ARA (April’16)- © 2016 - 29 ARA Research Momentum Calculations  Daily and End of Month Market Close Calculations Utilized  Lookback Periods:  Absolute Performance: 3, 6, and 12 Month  Absolute Performance With Non-Zero (2.5%) Cutoff: 6 Months  Moving Average: 200 Day Simple Moving Average and Various Exponentially Weighted Moving Averages  Buy-Sell Decisions Made Once Per Mth; Last Trading Day of the Mth  Tax Scenarios (Deferred vs. Instant): 1) Taxed at End of Holding Period (Retirement Account)s; Also True for B&H 2) Taxed at 33% on a Trade Gain, No Tax Benefit on Trade Loss  Fees/Spread: Low Cost ($10) Trades, Spread Not Taken Into Account  Invested Return and Maximum Draw-Down Calculated
  30. 30. Semiconductors ARA (April’16)- © 2016 - 30 ARA Research Momentum Summary: 1st Rule  A Momentum-Based Trading Rule Can Yield Better Results Than B&H  Lookback Period Matters – A Lot: Only 200 Day SMA and 3 Mth Lookbacks Provided Greater Returns Than B&H in a Taxed Account  Taxes Matter: In a Deferred Tax Account Momentum-Based Trading Yields Better Results Than B&H in All Cases Except for 12 Mth Lookback  No Momentum Rule Will Outperform B&H All of The Time; There Can be Significant Periods (Years) of Underperformance  3 Month Lookback Period Gave Best Overall Performance Over 20 Yr Period, But in a Taxed Account Underperformed B&H for First 14 Years  200 Day Simple Moving Avg Outperformed B&H Through 2013, But Has Underperformed Since & is Now ~ Break-even in a Taxed Account B&H Taxed No Tax Taxed No Tax Taxed No Tax Taxed No Tax Taxed No Tax $1,000 Becomes $4,142 $5,103 $10,147 $2,650 $4,289 $1,860 $2,279 $4,276 $6,877 $3,685 $5,611 $ Trades (B&S) n/a 58 58 44 44 26 26 38 38 42 42 Avg Trades/Year n/a 2.9 2.9 2.2 2.2 1.3 1.3 1.9 1.9 2.1 2 Max Draw Down 73% 60% 50% 57% 44% 65% 60% 50% 42% 57% 44% Median Draw Down 52% 37% 29% 42% 38% 39% 39% 35% 30% 41% 36% 3 Mth Lookback 6 Mth Lookback 12 Mth Lookback 200 Day SMA 6M LB / 2.5% CritSOX Results Through March 31, 2016
  31. 31. Semiconductors ARA (April’16)- © 2016 - 31 ARA Research SOX B&H vs. Mtm 3 Mth Lookback B&H Taxed No Tax $1,000 Becomes $4,142 $5,103 $10,147 $ Trades (B&S) n/a 58 58 Avg Trades/Year n/a 2.9 2.9 Max Draw Down 73% 60% 50% Median Draw Down 52% 37% 29% 3 Mth Lookback Through March 31, 2016
  32. 32. Semiconductors ARA (April’16)- © 2016 - 32 ARA Research SOX B&H vs. Mtm 6 Mth Lookback B&H Taxed No Tax $1,000 Becomes $4,142 $2,650 $4,289 $ Trades (B&S) n/a 44 44 Avg Trades/Year n/a 2.2 2.2 Max Draw Down 73% 57% 44% Median Draw Down 52% 42% 38% 6 Mth Lookback Through March 31, 2016
  33. 33. Semiconductors ARA (April’16)- © 2016 - 33 ARA Research SOX B&H vs. Mtm 12 Mth Lookback B&H Taxed No Tax $1,000 Becomes $4,142 $1,860 $2,279 $ Trades (B&S) n/a 26 26 Avg Trades/Year n/a 1.3 1.3 Max Draw Down 73% 65% 60% Median Draw Down 52% 39% 39% 12 Mth Lookback Through March 31, 2016
  34. 34. Semiconductors ARA (April’16)- © 2016 - 34 ARA Research SOX Index & 200 Day SMA Through March 31, 2016
  35. 35. Semiconductors ARA (April’16)- © 2016 - 35 ARA Research B&H vs. 200 Day SMA Lookback Through March 31, 2016 B&H Taxed No Tax $1,000 Becomes $4,142 $4,276 $6,877 $ Trades (B&S) n/a 38 38 Avg Trades/Year n/a 1.9 1.9 Max Draw Down 73% 50% 42% Median Draw Down 52% 35% 30% 200 Day SMA
  36. 36. Semiconductors ARA (April’16)- © 2016 - 36 ARA Research Impact of Non-Zero Threshold Criteria: 6 Mth Look Price ≥ 2.5% Higher Than Current Price to “Buy” Through March 31, 2016 B&H Taxed No Tax $1,000 Becomes $4,142 $3,685 $5,611 $ Trades (B&S) n/a 42 42 Avg Trades/Year n/a 2.1 2.1 Max Draw Down 73% 57% 44% Median Draw Down 52% 41% 36% 6 Mth LB / 2.5% Criteria
  37. 37. Semiconductors ARA (April’16)- © 2016 - 37 ARA Research A Closer Look at 3 Mth Lookback Through March 31, 2016
  38. 38. Semiconductors ARA (April’16)- © 2016 - 38 ARA Research Where Are We So Far?  Compared to “Buy & Hold” Investing No Really Good Alternatives Using Simple Momentum Rules on SOX  Results Are Highly Dependent on Lookback Period; Only One of The Four Lookback Periods Beat B&H in a Taxed Account With Any Degree of Margin  The Best Performing Lookback Period (3 Mths), While Producing a Good End Result, Under-Performed “Buy & Hold” For The First 14 Years of The Index Is There a Way To Adjust Momentum in a Simple Manner That Significantly Improves The Results?
  39. 39. Semiconductors ARA (April’16)- © 2016 - 39 ARA Research Momentum Summary: 2nd Rule  Applying Recession Filter (Use Mtm Rule Only Within Recession Limits) Significantly Improves Performance Over Using Mtm Rule at All Times  Required Very Few (Only 6 Trades; 3 Buy-Sells) Trades Over 20+ Years  Does Not Provide as Good Overall Return as Mtm 3 Mth Lookback, But Does Outperform B&H in Any Given Month For Almost The Entire 20+ Year Period  As Noted Previously The Mtm 3 Mth Lookback Method Underperformed B&H For Most of the First ~14 Years of the SOX (Pg. 37)  Much More Likely to Stay With an Investment Strategy When It Out-Performs Alternative Strategies in Most Years B&H Taxed No Tax Taxed No Tax Taxed No Tax $1,000 Becomes $4,142 $5,103 $10,147 $4,276 $6,877 $6,917 $8,590 $ Trades (B&S) n/a 58 58 38 38 6 6 Avg Trades/Year n/a 2.9 2.9 1.9 1.9 0.3 0.3 Max Draw Down 73% 60% 50% 50% 42% 66% 66% Median Draw Down 52% 37% 29% 35% 30% 52% 42% SMA - Recession3 Mth Lookback 200 Day SMASOX Results Through March 31, 2016
  40. 40. Semiconductors ARA (April’16)- © 2016 - 40 ARA Research Momentum Rule Only in Recession Criteria: 200 Day SMA Applied Only During Recessionary Periods B&H Taxed No Tax $1,000 Becomes $4,142 $6,917 $8,590 $ Trades (B&S) n/a 6 6 Avg Trades/Year n/a 0.3 0.3 Max Draw Down 73% 66% 66% Median Draw Down 52% 52% 42% 200 Day SMA - RecessionSOX Results Through March 31, 2016
  41. 41. Semiconductors ARA (April’16)- © 2016 - 41 ARA Research Momentum: Always vs. Recession Criteria: 200 Day SMA – Res = Momentum Rule Applied Only During Recessions 200 Day SMA – Momentum Rule Applied Entire Time B&H Always Recessions $1,000 Becomes $4,142 $4,276 $6,917 $ Trades (B&S) n/a 38 6 Avg Trades/Year n/a 1.9 0.3 Max Draw Down 73% 50% 66% Median Draw Down 52% 35% 52% 200 Day SMA SOX Results Through March 31, 2016
  42. 42. Semiconductors ARA (April’16)- © 2016 - 42 ARA Research Appendix: Background Information ARA ResearchARA Research
  43. 43. Semiconductors ARA (April’16)- © 2016 - 43 ARA Research WW Semiconductor Sales Growth Rate Drop From Historical 15% CAGR to 6% Since 2000 Given Industry Size & Penetration Don’t Expect Return to 15% CAGR Unless Global GDP Exceeds 4 – 4.5% Consistently “Semiconductor Industry Primer 2015” D. Wong (Wells Fargo) Oct’15
  44. 44. Semiconductors ARA (April’16)- © 2016 - 44 ARA Research NASDAQ Correlation to S&P500 Regression Coefficient (R2) 1994 - 2016 2001 - 2016 2006 - 2016 0.90 0.94 0.93
  45. 45. Semiconductors ARA (April’16)- © 2016 - 45 ARA Research SOX Index Summary  PHLX Semiconductor Sector Index is a Modified Capitalization Weighted Index Made Up of the Major Companies in the Semiconductor Sector  Two Versions  Price Return Index (SOX): Calculated Without Regard To Cash Dividends on Index Securities (Initiated Dec 1st 1993 at Base Value = $100)  Total Return Index (XSOX): Reinvests Cash Dividends on Ex-Date.; Synchronized to Value of The Price Return Index at The Close on Dec 22, 2009  Both Indexes Reflect Extraordinary Cash Distributions  Index Eligibility (Main Points)  Be Listed on NASDAQ Stock Market or New York Stock Exchange  Have Minimum Market Capitalization of $100 Million  Have Traded at Least 1.5 Million Shares in Each of Previous Six Months  Index Evaluation  Index Securities Evaluated Every Sept; Additions/Deletions Effective 3rd Friday of Sept  Securities Meeting Eligibility Criteria as of End of July Ranked By Market Capitalization  Top 30 Securities By Market Capitalization Included in Index
  46. 46. Semiconductors ARA (April’16)- © 2016 - 46 ARA Research SOX Index Calculation  Value of Index Equals Aggregate Value of Index Share Weights Step 1) Calculate Total Market Value of Index = Sum of Market Value of Each Index Component = The Last Sale Price Multiplied By Number of Shares Outstanding Step 2) Calculate Weight of Each Index Component = Its Market Value Divided By Total Market Value of Index Step 3) Employ Capitalization Weighting Adjustment/Modification Algorithm to Limit Contribution of Largest Market Cap Companies to 8% or Less (See Rebalancing Section) Step 4) Calculate Aggregate “Modified” Capitalization Weighted Market Value = Sum of Each Index Component's Weight and Last-sale Price Step 5) Divide Aggregate Weighted Market Value By Divisor, Which Scales Aggregate Value to Lower Value More Suitable For Reporting  Index Balancing  Index Employs a Modified Market Capitalization Weighting Methodology  Each Qtr, Index Rebalanced Such That Max Weight of Any Security Does Not Exceed 8% and No More Than 5 Securities Are at That Cap  Excess Weight of Any Capped Security is Distributed Proportionally Across Remaining Index Securities  If After Redistribution, Any of The 5 Highest Ranked Index Securities are Below 8%, These Securities are Not Capped  Next, Any Remaining Index Securities in Excess of 4% are Capped at 4% and The Excess Weight is Redistributed Proportionally Across Remaining Index Securities  Process is Repeated, As Necessary, To Derive The Final Weights
  47. 47. Semiconductors ARA (April’16)- © 2016 - 47 ARA Research SOX Index Companies 2013 - 15 Ticker Name Weight (%) Index MMC ($B) Market Cap ($B) Ticker Name Weight (%) Index MMC ($B) Ticker Name Weight (%) Index MMC ($B) ADI Analog Devices, Inc. 4.1 $18.4 $20.0 ADI Analog Devices, Inc. 3.9 $19.8 ADI Analog Devices, Inc. 3.8 $9 AMAT Applied Materials, Inc. 3.7 $16.3 $19.7 ALTR Altera (Intel) 2.7 $13.5 ALTR Altera (Intel) 3.3 $7 ARMH ARM Holdings plc 1.8 $8.0 $23.1 AMAT Applied Materials, Inc. 6.2 $31.4 AMAT Applied Materials, Inc. 6.3 $14 ASML ASML Holding NV 1.8 $8.0 $40.3 ARMH ARM Holdings plc 1.4 $6.9 AMD Advanced Micro Devices 0.7 $2 ATML Atmel Corporation 1.0 $4.5 $3.6 ASML ASML Holding NV 2.0 $10.3 ARMH ARM Holdings plc 1.8 $4 AVGO Avago Technologies 7.2 $32.3 $35.7 ATML Atmel Corporation 0.8 $4.0 ASML ASML Holding NV 3.0 $7 CAVM Cavium, Inc. 1.1 $5.0 $4.0 AVGO Avago Technologies 4.2 $21.6 ATML Atmel Corporation 1.0 $2 CY Cypress Semiconductor 0.9 $4.1 $3.4 BRCM Broadcom (Avago) 4.3 $21.8 AVGO Avago Technologies 3.4 $8 INFN Infinera Corporation 0.7 $3.3 $2.4 CREE Cree 0.9 $4.8 BRCM Broadcom (Avago) 3.8 $9 INTC Intel Corporation 8.7 $39.1 $166.0 FSL Freescale (NXP) 1.5 $7.7 CREE Cree 2.2 $5 KLAC KLA-Tencor Corporation 2.9 $12.9 $10.2 INTC Intel Corporation 7.8 $40.0 FSL Freescale (NXP) 1.2 $3 LLTC Linear Technology Corp 3.1 $13.9 $11.3 KLAC KLA-Tencor Corporation 3.3 $16.7 INTC Intel Corporation 8.0 $18 LRCX Lam Research Corporation 3.2 $14.5 $11.8 LLTC Linear Technology Corp 2.6 $13.0 KLAC KLA-Tencor Corporation 3.3 $8 MCHP Microchip Technology Inc. 2.9 $13.0 $10.4 LRCX Lam Research Corporation 3.1 $16.1 LLTC Linear Technology Corp 2.9 $7 MRVL Marvell Technology Group 1.3 $6.0 $5.0 MCHP Microchip Technology Inc. 2.2 $11.0 LRCX Lam Research Corporation 2.7 $6 MSCC Microsemi Corporation 1.0 $4.3 $3.5 MRVL Marvell Technology Group 1.7 $8.7 LSI LSI CORP 1.4 $3 MU Micron Technology, Inc. 3.7 $16.5 $18.6 MU Micron Technology, Inc. 8.1 $41.4 MCHP Microchip Technology Inc. 2.6 $6 MXIM Maxim Integrated Products 3.1 $14.1 $10.8 MXIM Maxim Integrated Products 2.1 $10.6 MRVL Marvell Technology Group 1.8 $4 NVDA NVIDIA Corporation 4.3 $19.4 $15.4 NVDA NVIDIA Corporation 2.6 $13.5 MU Micron Technology, Inc. 4.7 $11 NXPI NXP Semiconductors NV 4.2 $18.8 $22.3 NXPI NXP Semiconductors NV 4.0 $20.6 MXIM Maxim Integrated Products 2.6 $6 ON ON Semiconductor 1.3 $5.7 $4.7 ON ON Semiconductor 0.9 $4.7 NVDA NVIDIA Corporation 2.7 $6 QCOM Qualcomm Incorporated 7.7 $34.7 $95.4 QCOM Qualcomm Incorporated 8.3 $42.3 NXPI NXP Semiconductors NV 3.2 $7 QRVO Qorvo, Inc. 2.1 $9.4 $7.7 RFMD RF Micro Devices (Quorvo) 0.9 $4.8 ON ON Semiconductor 1.0 $2 SNDK SanDisk Corp. 4.5 $19.9 $16.0 SNDK SanDisk Corp. 3.9 $19.7 QCOM Qualcomm Incorporated 7.6 $17 SUNE SunEdison, Inc. 0.7 $3.1 $2.5 SUNE SunEdison, Inc. 1.3 $6.7 SNDK SanDisk Corp. 4.6 $10 SWKS Skyworks Solutions Inc. 3.4 $15.2 $15.8 SWKS Skyworks Solutions Inc. 2.8 $14.0 SWKS Skyworks Solutions Inc. 1.5 $3 TER Teradyne Inc. 1.1 $5.0 $4.0 TER Teradyne Inc. 0.9 $4.8 TER Teradyne Inc. 1.0 $2 TSM Taiwan Semiconductor Mfg 6.0 $26.7 $116.5 TSM Taiwan Semiconductor Mfg 4.2 $21.6 TSM Taiwan Semiconductor Mfg 5.9 $13 TXN Texas Instruments Inc. 8.8 $39.4 $60.5 TXN Texas Instruments Inc. 8.3 $42.3 TXN Texas Instruments Inc. 8.0 $18 XLNX Xilinx Inc. 3.5 $15.6 $48.7 XLNX Xilinx Inc. 3.0 $15.2 XLNX Xilinx Inc. 3.7 $8 Market Close Oct'22 2015 1.0 $447 $809 1.0 $509 1.0 $227 October 2015 October 2014 October 2013
  48. 48. Semiconductors ARA (April’16)- © 2016 - 48 ARA Research SOX Index Sept vs. Oct 2010  SOX Index Transitioned to Modified Market Cap Algorithm and 30 Companies Oct 2010  Prior to That SOX Index Carrier 16 – 21 Companies, While the iShares ETF (SOXX) Carried 52 Companies  Since Oct 2010 Both The SOX and SOXX Carried the Identical 30 Companies  Blue = Companies Added Oct’2010  Weightings Shown are for SOXX Ticker Name Weight (%) Index MMC ($B) Ticker Name ALTR Altera (Intel) 4.18 $7.4 ALTR Altera (Intel) AMAT Applied Materials, Inc. 7.86 $13.9 AMAT Applied Materials, Inc. AMD Advanced Micro Devices 3.25 $5.8 AMD Advanced Micro Devices ATHR Atheros (Qcom) 1.45 $2.6 ATHR Atheros (Qcom) AVGO Avago Technologies 3.88 $6.9 BRCM Broadcom (Avago) BRCM Broadcom (Avago) 8.98 $15.9 CREE Cree CREE Cree 3.16 $5.6 HITT Hittite Microwave (ADI) CRUS Cirrus Logic 0.57 $1.0 INTC Intel Corp HITT Hittite Microwave (ADI) 1.04 $1.8 KLAC KLA-Tencor Corp INTC Intel Corp 7.48 $13.2 LLTC Linear Technology Corp KLAC KLA-Tencor Corp 3.94 $7.0 LRCX Lam Research Corp LLTC Linear Technology Corp 3.72 $6.6 MU Micron Technology LRCX Lam Research Corp 3.74 $6.6 NSM National Semi (TI) MKSI MKS Instruments 0.68 $1.2 NVLS Novellus Systems (Lam) MRVL Marvell Technology Group 6.85 $12.1 SNDK SanDisk Corp. MU Micron Technology, Inc. 4.22 $7.5 STM ST Microelectronics NETL Netlogic Micro (BCOM) 1.26 $2.2 TER Teradyne NSM National Semi (TI) 2.16 $3.8 TSM Taiwan Semiconductor Mfg NVDA NVIDIA Corporation 4.26 $7.5 TXN Texas Instruments Inc. NVLS Novellus Systems (Lam) 1.77 $3.1 WFR MEMC Electronics POWI Power Integrations 0.63 $1.1 XLNX Xilinx Inc. RBCN Rubicon Technology 0.35 $0.6 SNDK SanDisk Corp. 3.73 $6.6 STM ST Microelectronics 0.46 $0.8 TER Teradyne Inc. 1.34 $2.4 TSM Taiwan Semiconductor Mfg 3.83 $6.8 TXN Texas Instruments Inc. 8.48 $15.0 VECO Veeco Instruments 1.13 $2.0 WFR MEMC Electronics 1.92 $3.4 XLNX Xilinx Inc. 3.67 $6.5 100% $177 September 2010October 2010
  49. 49. Semiconductors ARA (April’16)- © 2016 - 49 ARA Research SOX Index Cycles Table Median Min Max Up 123% 50% 496% Down -57% -69% -22% Neutral 3% -17% -4% Median Min Max Up 19 6 30 Down 10 7 17 Neutral 14 11 17 Cycle Change Summary Cycle Length Summary Cycle Start Cycle End Months in Cycle Cycle Change Cycle Start Cycle End Months in Cycle Cycle Change May-94 Sep-95 17 153% Feb-04 Aug-04 7 -65% Oct-95 Jul-96 10 -52% Sep-05 Apr-06 20 50% Aug-96 Sep-97 14 171% May-06 Sep-07 17 -4% Oct-97 Aug-98 11 -50% Oct-07 Feb-09 17 -63% Sep-98 Aug-00 24 496% Mar-09 May-11 27 133% Sep-00 Sep-01 13 -69% Jun-11 Dec-11 7 -22% Oct-01 Mar-02 6 72% Jan-12 Nov-12 11 9% Apr-02 Jan-03 10 -57% Dec-12 May-15 30 93% Feb-03 Jan-04 12 113% Jun-15 Mar-16 5 -9%
  50. 50. Semiconductors ARA (April’16)- © 2016 - 50 ARA Research Index Volatility  Basic Definition:  Standard Deviation of Historical Returns  Basically a “Dispersion” Measure; Greater Dispersion (Volatility) Implies Greater Risk  Upside & Downside Price Movements Are Equally Considered in the Volatility Calculation; The Sortino Ratio Attempts to Capture Just Downside Volatility  Calculation Step 1) Calculate Daily Periodic Stock Return (Ri) = (Pi – Pi-1)/Pi ; Where Pi is Current Day’s Closing Price and Pi-1 is Closing Price on Previous Day  More Often Ri = Ln(Pi/Pi-1) is Used as it Better Represents a Continuously Compounded Return; Approximately The Same For Most Short Intervals  This was the Method Employed in This Study Step 2) Decide on Time Period; Volatility for Both the Full 20 Year (1994 – 2014) as Well as 5 Year Intervals Was Calculated for The 3 Indices Examined in This Study Step 3) Calculate Daily Sample Variance = [ Sum(Pi-1 – Avg P)2 ] / (m-1); Where ‘m’ = Number of Sample Data Points Over Which The Sum is Performed Step 4) Calculate Annualized Sample Volatility = Sqrt (Sample Variance) x Sqrt (250); 250 Being The Number of Trading Days in a Typical Year  Note: To Calculate Annualized Weekly or Monthly Volatility Multiply The Corresponding Weekly or Monthly Volatility By Sqrt(52) or Sqrt(12) Respectively; The Calculated Volatility Will Be Slightly Different in Each Case
  • WilsonChan42

    May. 4, 2016

I updated an analysis that I did of the Philadelphia Semiconductor Stock Index (SOX) performance that I had done November 2105. The first part of the analysis provides a historical perspective and some simple analytics. The second part compares the SOX to standard benchmarks such as the S&P 500. The final section compares a simple momentum rule to a "Buy and Hold" investment strategy in the SOX. This analysis adds: 1) a section on how the SOX performs wrt recessions , 2) correlation analysis between the SOX and the NASDAQ and S&P 500, and 3) the use of a recession filter when applying momentum. Results are also updated as of March 31, 2016.

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