The PHLX Semiconductor Index (SOX) has gained about 3% so far in 2021 but is losing altitude at a rapid pace, dropping 8% off Jan. 21's all-time high at 3,142. The sector's 2020 leadership is taking an even bigger hit, with NVIDIA Corporation (NVDA) a few points in the red while Advanced Micro Devices, Inc. (AMD) has lost more than 6%. Not surprisingly, sector laggards are now leading the way, with Dow component Intel Corporation (INTC) up 11% after losing more than 17% last year.
Many sector components posted their all-time highs on Jan. 21, on the same day that Intel reported better-than-expected fourth quarter earnings and took off in a one-day wonder rally to a six-month high in the low $60s. The stock gapped down nearly four points in the following session, triggering aggressive profit-taking throughout the sector. Selling pressure has now eased, but another leg down appears likely in coming sessions.
The SOX index posted the first weekly sell signal since September at Friday's close and is testing the 50-day exponential moving average (EMA) for the first time since October. Theoretically, January should have been a great month for semiconductor stocks, with the prospect of strong economic growth in the second half stoking buying interest. The so-so month isn't the end of the world, but it is waving a red flag, warning that 2021 returns might not match last year's impressive run.
A laggard is a stock or security that is underperforming relative to its benchmark or peers. A laggard will have lower-than-average returns compared to the market. A laggard is the opposite of a leader.
NVIDIA Daily Chart (2018 – 2021)
NVIDIA reports fourth quarter 2020 earnings on Feb. 24, with analysts expecting the graphics giant to post a profit of $1.98 per share on $4.81 billion in revenue. If met, earnings per share (EPS) would mark a modest 4.7% profit increase compared to the same quarter in 2020. If you recall, NVIDIA and AMD are expected to benefit from Intel misfires, but as we saw with AMD's selloff last week, shareholders are growing impatient with limited quarterly progress.
NVIDIA stock posted an all-time high at $589 in September and eased into a symmetrical triangle pattern. Investors have been encouraged by this trading range, which typically represents a pause in an uptrend that reasserts itself sooner or later. However, monthly oscillators have now crossed into sell cycles that predict relative weakness into the second quarter, increasing the odds for a triangle breakdown and deeper correction.
Micron Daily Chart (2018 – 2021)
This is supposed to be a great year for Micron Technology, with memory prices stabilizing after a long period of oversupply. The stock is up 4% for the year but has reversed after testing multi-decade resistance at the 2000 high in the $90s. More importantly, it has sold off near 13% since posting a 2021 high at $87.25 on Jan. 20 and has crossed into a weekly sell cycle that predicts relative weakness into March.
Sidelined investors looking for Micron exposure may wish to wait for greater downside to unfold, with an eye on the 50-day EMA at $73. However, all bullish bets are off if the decline stretches into the late-December low at $69.14 because that would mark a 100% retracement of the last rally leg, setting off an automatic sell signal because the bearish action raises the odds that the uptrend has come to an end.
Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers. Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%.
The Bottom Line
The semiconductor sector may have entered an intermediate correction that could stretch to much lower price levels in coming weeks.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.