Chip Stocks Could Face Spring Headwinds

SMH ended last week near the $105 level after a break of its 80-day moving average

by Bernie Schaeffer

Published on May 21, 2019 at 7:09 AM
Updated on May 21, 2019 at 7:09 AM

Last week's round of reignited tariff tensions pushed trade-sensitive chip stocks back into the bearish crosshairs. The VanEck Vectors Semiconductors ETF (NYSEARCA:SMH) started the week with a big sell-off, losing 4.6% amid Monday's broad-based rout for its largest one-session percentage drop -- and its first daily close below its 80-day moving average -- since January.

Along with the rest of the equities market, SMH over the next couple of sessions recovered with enviable grace from Monday's fall. The shares spent Tuesday and Wednesday skimming back above their 80-day trendline, and even notched two consecutive closes back atop the $108 level -- site of a 10% correction from the April intraday high, and the lower rail of a short-term support zone that SMH gapped below at Monday's open -- in the process.

And with that heavy selling having swept stocks so efficiently lower early in the week, SMH remained resilient in the face of Thursday's sector-specific news that the Trump administration would now turn the screws on Beijing by erecting fresh barriers to the U.S. market for tech giant Huawei and its affiliates. The chip tracker ended the day down 1.4%, right around its opening levels, after having tested its footing on an intraday basis right around its (you guessed it) 80-day moving average.

Investor sentiment appeared equally resilient, as data shows that on Thursday, May 16, SMH garnered its third-biggest daily net inflows of the year-to-date period, ringing in at $212.55 million. Notably, given last week's unfolding tariff drama, the high-water mark for 2019 daily net inflows was set for the semiconductor-based exchange-traded fund (ETF) just one day prior, at $264.63 million.

In other words, over the course of last Wednesday and Thursday, net inflows for SMH totaled $477.18 million. That number may not strike you in any particular kind of way out of context, but it's fairly impressive if you're aware that reports total year-to-date net inflows for SMH at $300.93 million. So, last week's two-day spree of inflows effectively dragged SMH out of a $176.25 million year-to-date outflows hole.

Put another way, that big mid-week burst of interest in SMH yielded net inflows equivalent to 48.4% of the fund's current assets under management (AUM), and 60.6% of its average daily dollar volume of shares traded (over the last 45 days).

It may not seem that there's much to the story here, other than "capital flows into SMH coffers as ETF successfully tests support in the face of negative trade headlines." But while the fund's initial reclaiming of the 80-day moving average was impressive, SMH lost its footing above this trendline entirely on Friday, despite a valiant early effort to hold this level amid resurgent selling pressure. As troubling as this weekly trendline breach, from a technical standpoint, is the fact that the aforementioned $108 level appeared to be emerging as potential resistance in both Thursday and Friday's trading.

Meanwhile, short interest on SMH has only now climbed out of the basement, after falling to a two-year low at the start of March. The current accumulation of 15.43 million shorted shares has a long way to keep growing before it reaches anything like a peak -- but a 13.2% increase in short interest during the most recent reporting period suggests this could be a growing headwind for SMH going forward.

With "backup" support still in place at $105 as of this writing -- the approximate site of a 20% year-to-date return -- an all-out plunge isn't necessarily in the cards for SMH. However, signs of overenthusiasm (or at the very least, an overabundance of complacency) in the sentiment backdrop, coupled with very real fundamental uncertainties and the risk of emerging technical resistance, suggest that the weeks ahead could be a tough slog for the chip stock proxy.

smh 80-day moving average

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, May 19.

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