Why the red-hot semiconductor stocks could rally on

Semiconductor stocks are on a tear this year, and some strategists say the stocks’ technical setup, along with some bullish options market activity, points to more gains ahead.

Two popular semiconductor-tracking funds, the SMH and the SOXX, have both advanced roughly 20 percent year to date.

“When I think of the semiconductors space, I kind of visualize that five years ago they basically threw a bunch of the spaghetti at the wall to see what would stick. And we’re currently in an environment where a lot of things have stuck,” Stacey Gilbert, head of derivative strategy at Susquehanna, said Tuesday on CNBC’s “Trading Nation.”

It’s thanks to the recent advances in artificial intelligence, autonomous driving and data centers that semiconductor stocks have enjoyed such a rally, Gilbert said.

She continues to like Micron, a semiconductor stock that’s surged nearly 41 percent so far this year, and pointed to recent bullish call buying in the options market. That activity, along with consolidation in the space and positive margins, encourages her that there’s more room to run.

When it comes to Nvidia, which has risen nearly 36 percent so far this year, Gilbert said she “loves the story” but recognizes it’s currently carrying a valuation akin to that of an established technology brand like Intel without the same kind of revenue.

“We love the name; we like it more on a pullback,” she said, and said selling upside calls (or selling downside puts for an entry point) is a better way to play the name than simply buying the stock, “where we think valuation-wise it’s just gotten ahead of itself.”…

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