The Deep Dive

Semiconductors

Good morning,

This week we are doing a deep dive into semiconductors. Semiconductors are arguably the single industry most critical to today’s modern economy and live at a unique intersection of growth and extreme cyclicality. After falling sharply in 2022, the group has turned higher, arguably completed a bottoming process, and was leading the market higher well before growth stocks’ fortunes turned early this year.

This week we will review:

• What is the technical and relative set-up for semis

• Where are the best relative trends and bets for the industry

• What stocks are leading

• What stocks are lagging

• and more!

Let’s dive in!

---

Top-Down Look

Our Proxy: SMH- VanEck Semiconductor ETF

There are a number of different semiconductor ETFs on the market, but we’re using SMH as the basis for our analysis. Among other top competitors such as XSD (SPDR) and SOXX (iShares), SMH is the most liquid, and I believe the most representative of the industry because it includes international stocks, most notably Taiwan Semiconductor Manufacturing.

Technical set-up for SMH

Semiconductors have surged since the October lows, gaining more than 50% using the intraday levels. On the bullish side, SMH recently broke above the neckline of an inverse head and shoulders pattern, has a 50-DMA up above its 200-DMA, and posted a nice stand at support to end last week. However, like a lot of US indexes and ETFs, it also ended last week with a bearish MACD crossover, suggesting holding the breakout may be a tall task.

---

Semiconductors versus…

Versus the S&P 500

You know something is a high beta play when the relative chart looks just like the absolute chart. Versus the S&P 500, SMH just broke out to its highest level since March but is now facing a MACD sell signal. The similarity in the charts suggests that if the market does well, expect semiconductors to do better, and if the market falls expect semis to fall more. Overall, tactically I would be market-weight semiconductors relative to broad equities, but a pullback could be an opportunity to go overweight.

Versus the tech sector

Semiconductors have been a lagging area within technology since January 2021, when the very first signs of weakness started showing up in the most high beta and high growth names. However, recently they have been a much stronger area. Still, bearish momentum divergences suggest tactical weakness is likely even versus tech.

Versus software