(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Chip stocks have struggled in recent months and are trading nearly 6% below their 2018 highs as the broader market has posted new records. The worst may be far from over. Technical analysis suggests the chip stocks, as measured by the VanEck Vectors Semiconductor ETF (SMH), are poised to drop another 6% in the coming weeks. That would push the chips as a group close to their June lows.
Investors in chip stocks have good reason to be bearish because one of the industry's key indicators is going south - and fast. Semiconductor equipment billings, a key gauge of future business, fell to their lowest level since November of last year for North American companies. The billngs declined almost 6% in August, according to SEMI.org. (See:4 Oversold Chip Stocks Poised to Rise Short Term.)
Perhaps more ominous, the August reading is almost 17% off its May high of $2.7 billion. It is the fourth month in a row of declines.
The technical chart shows the VanEck Semiconductor ETF trending lower since peaking in March, part of a long-term period of consolidation. The ETF is near technical support of around $106.25. Should the ETF fall below that level, it could drop to around $100.50, a 6% decline. In total, that would push the ETF more than 12% below its March highs.
The relative strength index (RSI) is also suggesting that bullish momentum is coming out of the ETF. The RSI has been trending lower since reaching overbought levels in 2017. (See: Chip Stocks on Verge of Big Breakout: Todd Gordon.)
A Close Relationship
The PHLX Semiconductor Index has tracked the billing data closely in the past. While the latest decline in billing suggests a short-term downturn, the longer-term trend in the billing data has been higher since the start of 2016.
Boom and Bust Cycles
The semiconductor business is cyclical, with periods of massive expansions and contractions. That's why many stocks within the sector trade at such low valuations and have elevated levels of volatility. The latest billing data indicates that it's likely chip stocks will drop short term. The big question is whether this will turn into a steeper, longterm slide.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.