The stock market’s yearly downtrend has been interrupted by several sharp rallies that have often been led by semiconductor stocks. On both February 2nd and October 13th the VanEck Vectors Semiconductor ETF (SMH) had daily gains of over 7%.
The buying was likely fueled by those who remember or participated in the 64% total return in 2019 or the 55% in 2020. In 2022 it has been a much different story as the week’s decline of 3.7% did not help. According to Morningstar, the total return year-to-date for SMH is -33.4%.
So does the technical outlook for SMH and the most widely held semiconductor stocks justify buying them now?
The VanEck Vectors Semiconductor (ETF) peaked on Tuesday, January 4th 2022 at $315.11 and on the following Friday triggered a weekly doji sell signal (point 1). Two weeks later SMH dropped below the 20 week EMA and by early October 2022 it had a low of $165.09. SMH rallied as high as $231.95 on December 13th but closed just before Christmas at $203.48. There is next support in the $189-$190 area with the weekly starc- band at $183.56. There is weekly resistance at $244.60, line e.
The relative performance (RS) is a ratio of SMH to the S&P 500. When the RS (in red) is rising SMH is stronger than the S&P 500. A falling RS means that SMH is weaker than the S&P. The RS formed lower highs in January, line b and soon dropped below its WMA (in green). The decline below the RS support (line a) in early February warned of a more serious decline (line d). The RS shows a pattern of lower highs and dropped this week below its WMA indicating it is likely to be weaker than the S&P heading into 2023.
The on-balance-volume (OBV) also dropped below its WMA in January and then broke below the support at line c. For most of the year, the OBV has stayed below its WMA though it did move above it in August and then again just a few weeks ago. A move above the August high is needed to turn the OBV positive.
Micron Technology (MU) was in the news Wednesday as it missed earnings and announced plans to cut 10% of its workforce. An equal concern was the fact that they cut their long-term forecasts and their growth margin has not been this bad since 2008.
The April 2021 high for MU was exceeded in November 2021 with a high of $97.92, line a. That new high was not supported by the technical indicators. The weekly RS peaked in early 2021 and then formed a significantly lower high in early 2022, line b. The weakness in the RS was confirmed in March, line d, as it dropped below its WMA. The RS is negative now and has made a new low.
The OBV also formed much lower highs than prices, line c, which is also a negative or bearish divergence. The volume on the November move to the upside was low and the OBV barely made it above its WMA. The OBV dropped to a new low last week suggesting prices will soon follow.
Taiwan Semiconductors (TSM) is a 14.1% holding in SMH that completed a major top formation in March 2022, line e. The downside break of the trading range, lines a and b, meant that anyone who bought since December 2020 was now in the red. The width of the trading range was $35 so the drop below $107 generated a downside target at $72 that was met in October.
The sharp rally from the late October low took TSM from $59.24 to $83.26 in just five weeks. The rally has stalled below the downtrend, line f. TSM has closed below the 20 week EMA at $74.89 with support now in the $69-$70 area. The weekly starc- band is at $67.36.
The weekly RS for TSM formed lower highs in 2021, line c, while prices were forming higher highs, line a. This negative divergence indicated that TSM was losing its market leadership. The volume on the March decline was high and the OBV had also formed lower highs, line d. The OBV was leading prices lower which was a negative sign.
Both the RS and OBV are still above the October lows which may be a positive sign for the months ahead. The daily indicators (not shown) are negative with the key 61.8% Fibonacci support at $68.33.
NVIDIA Corporation (NVDA) is one of the most widely followed, as well as widely recommended, semiconductor stocks. It was down 5.3% last week more than the S&P 500 or the Invesco QQQ Trust (QQQ) of which it is a member. It is down 48% YTD after peaking at $346.10 in November 2021.
The technical studies did not form any divergences at the highs but did turn negative on January 7th when NVDA closed at $272.22, line b. The RS was very extended at the highs as noted by the gap between the RS and its WMA (in green). The drop below the WMA and the support at line a, turned it negative. The downtrend in the RS, line d, was broken three weeks ago which was an encouraging sign. The RS now needs to move above the recent high to indicate it is starting to lead the S&P 500.
The OBV dropped below its WMA the week of December 17th and by early January was in a well-defined downtrend. The volume was not strong on the recent rally and while the OBV moved above its WMA it did not overcome the downtrend, line f. The OBV closed last week just below its WMA.
NVDA has reached the 50% support level at $148 which is calculated from the October 13th low. The more important 61.8% support is at $138.58 which is the level to watch on a further decline. The declining 20 day EMA at $162.58 is the first level of resistance to watch. The daily technical studies (not shown) are still negative and declining.
The probability of success should be best if you watch SMH as well as TSM, NVDA. MU and maybe a few other key semiconductor stocks for signs of a turn. In the Viper Hot Stock’s latest scan of S&P 500 stocks were three new semiconductor stocks on the sell list.
The negative short-term outlook and the decline last week in SMH suggest it is likely too early to look for a turnaround in the semiconductor sector. There are quite a few stocks in this industry group as StockCharts lists 94 stocks so there is a chance that a few may outperform SMH. The strongest and most sustained stock rallies generally occur when the underlying industry group is also strong.