Potential Decline in Chip Sector Stocks in Upcoming Weeks
Semiconductor equities face a possible downturn following a recent two-month rally, with the potential to test much lower levels in the near future.
Semiconductor stocks, after experiencing a robust two-month surge, are now showing signs of losing momentum and could decline further in the coming weeks. This downturn may exert additional downward pressure on the Nasdaq 100, aligning its short-term performance with the lagging S&P 500. A market correction could also weaken the improving technical outlook of the semiconductor industry, raising the possibility of revisiting the March lows.
The expiration of the 90-day enforcement clause of the fragile Phase One trade agreement at midnight on Friday could reignite US-China tensions amid rising unemployment. Reuters reports that President Trump plans to restrict chip exports to Huawei, the Chinese smartphone manufacturer under investigation for alleged political activities. China has warned of retaliation by adding US firms to an 'Unreliable Entity List,' potentially limiting sales of American high-tech products, including semiconductors.
While President Trump has recently stepped back from the most severe retaliatory actions since initiating the trade war in January 2020, enforcement measures may still restrict his options. Additionally, he is seeking ways to hold China accountable for the coronavirus pandemic, keeping this issue at the forefront of the 2020 political agenda ahead of the November elections. This brinkmanship could undermine the recent two-month rally, especially around key Fibonacci and moving average resistance levels.
The PHLX Semiconductor Index (SOX) peaked at 1,362 in 2000 amid the internet bubble boom. It then plummeted nearly 85% by 2002, reaching a low point before recovering slightly into 2004. A significant sell-off in 2007 broke support during the 2008 financial crisis, reaching a 12-year low in 2009. The subsequent decade saw a recovery that peaked again in 2014, with a breakout that stalled at the 50% Fibonacci retracement of the nine-year downtrend. The index surpassed that level in 2016, fully retracing to the 2000 high by 2018. It traded sideways until October 2019, then surged to an all-time high of 1,983 in February 2020, just before a 39% decline into the March lows.
The recent bounce in April reversed at the .786 Fibonacci retracement level, leading to a downturn testing the 50- and 200-day exponential moving averages (EMA) around 1,650 to 1,675. A breakdown below these levels could reinforce resistance and suggest a potential retracement of most of the first quarter’s decline, echoing previous support tests from March’s breakout.
NVIDIA (NVDA) experienced a historic rally in late 2015 fueled by cryptocurrency mining demand for its high-performance graphics cards. The stock peaked at $293 in October 2018 before declining over 57% into December, reaching a two-year low. It then recovered, retracing fully to its previous high by February 2020, but failed to sustain the breakout, falling 40% to $181 in March. More recently, the stock attempted a minor recovery in May, retracing its February high, but the on-balance volume (OBV) indicator suggests that much of this bounce was driven by short covering rather than strong buying interest. The limited volume support indicates a potential for a significant pullback ahead.
Key Takeaways
Semiconductor stocks have exhausted their short-term momentum after a two-month rally and may see a retracement of gains.
Disclaimer: The author did not hold any positions in the mentioned securities at the time of publication.
Have a news tip for Investopedia? Reach out to us at tips@investopedia.com.
Explore useful articles in Markets News as of 20-05-2020. The article titled " Potential Decline in Chip Sector Stocks in Upcoming Weeks " offers in-depth analysis and practical advice in the Markets News field. Each article is carefully crafted by experts to provide maximum value to readers.
The " Potential Decline in Chip Sector Stocks in Upcoming Weeks " article expands your knowledge in Markets News, keeps you informed about the latest developments, and helps you make well-informed decisions. Each article is based on unique content, ensuring originality and quality.