Semis' Sweet Lowdown

Semiconductor stocks entered Friday poised to advance beyond month-old high-water marks, thanks to two weeks of quiet gains and a positive financial report from Dell(DELL Quote).

The brighter prospects have traders looking at this as the possible start of a second-half rally in chips.

"If a move in semis happens, it will happen quickly," says Kim Arthur, managing director with Main Management in San Francisco.

Chip stocks have struggled this year amid a lingering inventory correction and muted demand expected this year and next. The fits and starts for semiconductor stocks in previous months have mostly seemed to hinge on expectations for demand increases in the second half of 2005.

After the latest round of financial reports, which largely reflected ongoing caution and continued hope for a stronger second half, industry stocks have been slowly picking up steam.

On Thursday, these increases culminated in some notable levels nearly being surpassed for the first time in a month: The Philadelphia Semiconductor Index closed just below 400, the Semiconductor HOLDRs(SMH Quote) ended above $32 and traded near $32.50 intraday, and Intel(INTC Quote), the world's largest chipmaker, challenged its intermediate-term barrier of $25.

"We saw the brakes put on with the Chinese New Year and then, after a lag, things have picked up," says Arthur. "A lot of companies didn't jump up and down saying things are great, but they also didn't say 'there's another disaster in front of us.' That alone might have given investors a little relief."

Arthur made his comments before Dell announced a solid first quarter late Thursday and an outlook for the second quarter that provided some opportunity of upside. "We're still confident that the market is healthy," said Dell CEO Kevin Rollins. "It's not explosive and it's not trailing off."

Conventional wisdom holds that chip stocks move ahead of fundamentals. If investor faith begins to solidify around the second half of the year and if that in turn leads to a more robust view of 2006, then stocks could respond positively.