Overtime

Semiconductors

Good morning,

This week, we’re taking semiconductors into Overtime.

Amidst the AI boom, the industry has grown to become the largest industry group within the S&P 500, making up more than 1/3 of the S&P 500 technology sector.

It’s also led the most recent market decline peaking in early July and still down more than 20% from those highs. Clearly, other areas of the market can do well if semis are declining but if the S&P 500 is going to make new highs this year, semiconductors will need to find a bottom.

Today, we’ll break down semiconductors from both the top-down and bottom-up, highlighting relative strength, sentiment indicators, and key levels to watch on bellwether stocks.

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Top Down

Starting at the very top, tech isn’t leadership

We highlighted the death cross in the XLK:SPY ratio two weeks ago, but it’s noteworthy that last Friday took us below the August lows to a new 52-week low. Does it mean tech is set for years of underperformance? No. But it does tell us that the relative trend has turned and we shouldn’t be overweight tech until that changes.

SMH testing the 200-DMA again

Looking at semis specifically, the VanEck Semiconductor ETF gained 2.3% yesterday and got back above its 200-DMA. However, yesterday was just an “inside day” (meaning SMH didn’t even get back to where it opened on Friday) and investors should remain skeptical of rallies below $235. Finally, there is a crude potential head and shoulders top here, but as I cautioned with double-tops in yesterday’s Playbook, this would only be actionable with a break of $200.

What’s the trend?

Right now, 3 of our 4 moving averages have positive slopes. However, if SMH can’t continue to rally off the 200-DMA and put in a bottom now, the 1-month and 6-month MAs are likely to roll over. We would still have the 12-month MA upward sloping, but if the 1-, 3-, and 6-month MAs are all facing lower, that really tells us that the tactical trend isn’t in our favor.

Flows have remained aggressive, doesn’t help the bull case

One thing that could help usher in a bottom would be capitulation or a sentiment flush. Unfortunately for bulls, SMH continued to take in steady inflows even during its 29% drawdown in August. This indicates retail investors haven’t yet given up on the sector, but they may need to before we see a bottom.

SMH vs. SPX