The Semiconductor Sector Breaks Out to a New All-Time High, Suggesting Much Higher Prices

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In my November 21st newsletter, I wrote, The Semiconductor Breakout is Strongly Suggesting That the Semis and the Market have Much More Upside. At that time, the Semiconductor ETF (SMH) had just broken out over resistance at its July high, rallying to a new all-time. Since that time, the SMH has been consolidating in a bull flag, of which it decisively broke out on Monday to another new all-time high.

Looking back longer, we see that the SMH has broken out of a major cup & handle formation dating back to latter 2021. While there are no guarantees in the stock market, this is very technically bullish and portends to significantly higher prices.

While there’s debate around which companies will benefit the most from AI technology productivity enhancements, and how much will it mean for their bottom line, there’s no debate that the semiconductor industry is a big benefactor due to the massive data crunching needed for AI data centers.

Over the past 4 weeks, the Equal-Weighted Semiconductor ETF (XSD) has been outperforming the market-cap weighted SMH, which it hasn’t done since November 2023. This reflects broader participation in the overall semiconductor sector and the 25 component SMH ETF, rather than just having mega-cap Nvidia doing most of the heavy lifting.

The improved relative strength of the equal-weight XSD shows a broader, and most likely a stronger upside move for the semiconductor sector. It also generates more more quality trading setups/trades of individual semiconductor stocks in the high-beta sector.

Interestingly, the SMH broke out to a new high without its sector general, Nvidia, participating. Mega-cap Nvidia has a 19% weighting in the SMH. Nvidia has recently been underperforming the SMH due to the U.S. AI export controls of high-end AI chips to China. Nvidia is working on versions of its high-end AI chips that will adhere to the export restrictions.

If Nvidia can overcome or lessen the Chinese export restriction issue, and Nvidia’s stock simply starts performing in-line with the SMH, it suggests even more upside potential for the SMH.

Let’s look at a couple of other key semiconductor names. Broadcom (AVGO), which has the 3rd largest percentage weighting of the SMH, was up 9% today on very heavy volume — making another new all-time high. This suggests materially higher prices.

Taiwan Semiconductor (TSM), has the 2nd largest market-cap weighting in the SMH at 13%. As the largest semiconductor manufacturer (foundry) in the world, TSM’s stock provides an important “tell” about the condition of the broader semiconductor industry beyond just AI-focused chips. TSM broke out of its own bull flag last Thursday/Friday, providing a heads-up of a potential SMH breakout from its own bull flag — which occurred today (see chart above). TSM has a good ways to go before it encounters resistance at its June high.

In short, the semiconductor sector is in full bull-mode, with strong fundamental underpinnings and strong technical/trend confirmation. The high-beta semiconductor sector is a good barometer of the overall risk-on or risk-off appetite for equities, and it’s suggesting that there’s materially more upside for the broader indexes.

Regarding the major indexes, today the S&P 500 made a new 2023 intraday high and another closing high. I’ve been discussing how the major indexes are short-term extended and overbought. But the fact that they have remained overbought, without a substantial pullback or decline in breadth, is bullish. Bull(ish) markets get overbought and stay overbought; just as bear markets get oversold and stay oversold.

The breakout over the S&P 500’s July high makes the index’s all-time high of 4818 (from early January 2022), the next pragmatic price target.

The tech-heavy Nasdaq 100 has also (decisively) completed a breakout over resistance at it July high. Long-dated tech/growth stocks benefit, in particular, from the decline in long-term Treasury yields.

The Nasdaq 100’s breakout over the July high makes the index’s all-time high of 16,764 (from late 2021), the next logical price target. The fact that the semiconductor sector has already broken out to a new high suggests that the tech-heavy Nasdaq 100 will do the same.

The semiconductor sector is not the only high-beta area of the market that is sending a risk-on market signal. The S&P 500 High-Beta ETF continues to handily outperform both the S&P 500 Low-Beta ETF and the S&P 500, itself, illustrating that a broad risk-on appetite continues unabated. The market is not likely to roll over in a big way if this indicator doesn't do the same.

The trend remains up and the major indexes, and important sectors, are taking out key resistance levels. A significant hiccup in the trend is not likely through year-end, at least.

On to a new/updated focus watchlist.

Focus Watchlist

I try to recommend trades that are timely and that a breakout/breakdown is likely to occur soon. If I take a stock or ETF off the focus watchlist, it may be because the trade needs more time to ripen, it ran away from us, or I’m no longer considering it at all.