Semiconductor Sector at a Critical Crossroads

QQQ breached this $370 region on Tuesday

Managing Editor
Aug 18, 2023 at 1:47 PM
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Subscribers to Chart of the Week received this commentary on Sunday, August 13.

The semiconductor sector was subjected to a roller coaster of headlines in the last week. On Thursday, the Biden administration issued an executive order banning U.S. investment in China relating to advanced semiconductors, while mandating American investors must disclose to Washington about investments in other types of semiconductors and artificial intelligence (AI).

This is the latest effort from the U.S. to decouple itself from China in the chip arms race, the first salvo fired last year after the Biden administration blocked China’s ability to buy AI chips and advanced chip-making equipment through additional export controls. In response, stateside semiconductor stalwarts like Nvidia (NVDA), Advanced Micro Devices (AMD), and Intel (INTC) initially moved higher on the news Thursday, only to fall victim to broad-market weakness.

Earlier in the week, Taiwan Semiconductor (TSM) announced plans to build a $11 billion plant in Germany – the first in Europe. This shows the impact of the European Chips Act, a $43 billion euro subsidy plan to double its chipmaking capacity by 2030, in hopes to catch Asia and the U.S., after shortages and high prices during the pandemic decimated the continent's carmakers and machine builders. Roughly a week ago, rumors of a revolutionary room temperature ‘superconductor’ developed in South Korea captivated the internet, only to be debunked as a diamagnetic semiconductor, snuffing out the excitement of a miracle breakthrough in the way technology is powered.

With all these macro headlines, political jockeying, and pump-fake breakthroughs, how has the VanEck Vectors Semiconductors ETF (SMH) fared through it all? Despite a 44% year-to-date gain, SMH is off by 8% in August, pulling back from its July 31 all-time high of $161.17. The ETF has spent the majority of the last three days below its 50-day moving average, for the first time since early May.

Put traders are responding in stride, with SMH’s buy-to-open put/call ratio climbing to its highest level of the summer, per the chart below from Schaeffer’s Senior Market Strategist Chris Prybal. The ratio may be curling higher, but still is in the bottom quartet of 2023. The recent underperformance, underlying options activity, and flurry of headlines are the first signs of weakness from SMH we’ve seen all year. If you’re bullish on the ETF that’s up 13% year-over-year and optimistic about the shifting tectonic plates of semiconductor relations globally, the breather should be a blip on the radar. However, tech overall could be in for a ‘new normal.’


COTW pc Ratio SMH


Senior Market Strategist – and recent podcast wizard -- Matthew Timpane tweeted last week about the recent Invesco QQQ Trust Series 1 (QQQ) pullback, off 5.3% from its July 19 record high of $387.98. As Matt notes, QQQ breached this $370 region on Tuesday, and has been testing that level the rest of the week. With QQQ last seen at $367.03, this test/retest cycle could be indicative of not necessarily a new downtrend, but a period of whipsaw price action around key areas.



Take NVDA as an example, a semiconductor stock with a significant influence on both ETFs we’ve been discussing; 4.7% of its holdings in QQQ and 20% in SMH. On Wednesday, Nvidia stock breached its 50-day moving average on a closing basis for the first time since Jan. 6. This level, in similar vein to QQQ, has been tested all week. The similar price action of NVDA, SMH, and QQQ this week – all bellwethers of tech -- could be preview of some short-term waffling the sector could see ahead. And given the blistering pace tech has been on in 2023, it could open up some intriguing entry points for prudent, contrarian investors.




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