Chipmakers May Soon Rebound to New Highs

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of SWKS.)

Chipmaker stocks have been pounded with shares of iShares PHLX Semiconductor ETF (SOXX) down over 11% off its highs, versus an S&P 500 that has declined by almost 8%. An Investopedia article on April 23, noted the group was on the verge of significant declines if crucial support levels were cracked, and to this point that has not happened. With support levels holding firm, it appears the group may be set to rise in coming the weeks, based on technical analysis.

Results from critical chipmakers such as Intel Corp. (INTC) and Texas Instruments Inc. (TXN) were much better than most had feared. Additionally, Apple Inc. (AAPL) results were also much stronger than expected, lending support to the suppliers, like Skyworks Solutions Inc. (SWKS), Broadcom Inc. (AVGO), and Qorvo Inc. (QRVO). With investors nerves now calmed, the group appears ready to rise back to its old highs, and higher. 

SOXX Chart

SOXX data by YCharts

New Highs

The chart below shows that the chipmaker ETF has steadily held support in the $166 to $167 region, and that was a critical area of support as the April 23 Investopedia article noted. With strong support in that region now in place and retested on three separate occasions, the group may not be poised to rise by 13%, back to roughly $197 or higher.  

Improving Relative Strength

The relative strength index (RSI), is also showing signs of a bottoming process, hitting a level around 35 on three separate occasions since late November. In the past, each time the RSI has hit a level around 35, it has proven to be a bottom in the group, resulting in shares of the ETF and the sector rising in the weeks that followed. In fact, since 2016 the RSI has only fallen lower than 35 just one time, back in January 2016. 

Strong Results

Intel is an example of one company that easily beat analysts estimates for the first-quarter. The company reported earnings on April 26 that beat analysts estimates by nearly 21% at  $0.87 per share, while revenue topped estimates by almost 7% at $16.07 billion. Texas Instruments also delivered strong results, beating earnings estimates by 11.8% at $1.29 per share, while revenue topped estimates by nearly 4%, at $3.789 billion. 

The improving technicals setup is a positive for the group, and should further positive newsflow continue to evolve, the group could see a meaningful rally. 

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 holdingsInformation 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.

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