Chip Stocks Are About to Lead

Chip stocks are getting ready to embark on a major recovery rally. This surprising bounce should be quite rewarding and lead to bullish calls that the group has finally bottomed out and is entering a new uptrend. But notable challenges remain for the sector in 2009, so as usual, good market timing will be needed to take advantage of the expected upside

In the meantime, buy signals may grow loud enough in coming weeks for this group to lead the world markets through the first half of next year. This contrary behavior makes sense because leadership after big downturns often comes from groups that were engaged in steep downtrends when stronger sectors rolled over and started to decline.

It's no secret that chip stocks have performed far worse than the major averages in recent years as competition grows and the world gets saturated with their high-tech products. But there comes a time when an adverse environment and diminishing value move into relative balance, and that might happen in the next six to 12 weeks.

In the meantime, interested investors can track the following charts to pick out strategies that match their risk tolerance. Just keep in mind that this remains a nervous, news-driven market and we may not have seen the bottom tick of the sector decline. But the turnaround should come, with early adapters profiting greatly from the big turn.