The bull market's rebound has pushed chip stocks to their most overbought levels in fifteen months as measured by the sector's surging relative strength, which could lead to a pullback. Chip stocks' relative strength index (RSI), a key momentum gauge, has risen to as high as 70 for the VanEck Vectors Semiconductor ETF (SMH), a threshold which has historically signaled overbought conditions, per a detailed story in CNBC.

Many chip stocks have sped way ahead of the market this year, including Intel Corp. (INTC), Advanced Micro Devices Inc. (AMD), Texas Instruments Inc. (TXN), Universal Display Corp. (OLED), Skyworks Solutions Inc. (SWKS), and ON Semiconductor Corp. (ON), among others.

6 Chip High-Fliers

(YTD Stock Performance)

  • Intel Corp. (INTC), 24.7%
  • Skyworks Solutions Inc. (SWKS); 32.2%
  • Texas Instruments Inc. (TXN); 21.4%
  • Taiwan Semiconductor Manufacturing Co. (TSM); 22.2%
  • Nvidia Corp. (NVDA); 40.2%
  • ON Semiconductor Corp. (ON); 37%

Source: Investopedia

14% Plunge After Last Peak

The last time the SMH's RSI was as high as 70 was in early 2018. After that last peak, the sector suffered a 14% drop in less than three weeks.

Gina Sanchez, CEO of Chantico Global, warns that investors should shy away from trading the sector as a group, noting that “there’s a lot of different stories trading in that whole group stocks.” For example, while AMD has skyrocketed 165% over 12 months, rival chip maker Nvidia has tanked 21%. As a result, she says investors should choose stocks from the group wisely.

Some market watchers argue that being overbought may not be bad. “Overbought is just a momentum surge,” said JC O’Hara, chief market technician at MKM Partners. “If you look back at February, as the semis were moving higher, the SMH hit 70. If you sold then, you would have missed an additional 12% on the upside," he added, per CNBC. O’Hara recommends buying on any sort of minor weakness in the chip space, indicating that his team “actually thinks the strong trends continue higher from here.”

Looking Ahead

While chip stocks have rallied on investor optimism, warning signs remain. Last month, European semiconductor maker Infineon Technologies cut its sales guidance for 2019 nearly in half, citing weaker macroeconomic conditions in key markets including China. Additionally, risks surrounding strained U.S.-China trade talks make chip stocks with heavy reliance on the Asian market especially vulnerable, as outlined by the Wall Street Journal. While semis have benefited from the improved outlook for a trade deal, they would be “front and center in terms of being punished if the ultimate trade deal isn’t what investors were hoping,” says analyst Daniel Ives of Wedbush Securities.