Semiconductor Stocks Could Have Reached Their Peak Following an Unprecedented Surge

The PHLX Semiconductor Index (SOX) may have reached its zenith after an extraordinary rally that propelled it over 50% higher within eight months. Should this be the case, the index might undergo a prolonged intermediate correction, potentially declining between 15% and 25%, targeting support levels near 1,500. Notably, leading stocks within the sector could experience even steeper declines, driven by an oversupply of nervous investors neglecting mounting risks.

The index completed a full cycle by revisiting the 2000 dot-com bubble peak at the beginning of 2018, entering a period of consolidation that culminated in a confirmed breakout in late 2019. The remarkable gains since then are justified, as this event triggered strong long-term buying signals, prompting analysts worldwide to upgrade the semiconductor sector. However, this impressive upward momentum has pushed relative strength indicators into extreme overbought territory, coinciding with emerging headwinds that threaten to disrupt the decade-long bull run.

Semiconductor stocks are particularly sensitive to the Chinese economy, which is currently under strain due to trade tariffs and the ongoing coronavirus pandemic. Disruptions in the supply chain could negatively impact profits for many U.S. manufacturers, although higher prices might partially offset these effects. Additionally, the sector's performance often mirrors the broader U.S. economy, which is now experiencing a prolonged expansion phase showing signs of maturity.

A swift resolution to the viral outbreak could provide relief, but history suggests otherwise, as previous epidemics have typically taken around 13 weeks for infection rates to stabilize. Moreover, this virus appears far more contagious than recent outbreaks faced by the U.S., adding significant uncertainty for cautious investors looking to capitalize on lower stock prices to rebuild positions.

SOX Long-Term Performance (2000 – 2020)

The index surged to 1,362 in March 2000 before breaking down from a topping formation shortly thereafter, initiating a steep decline of approximately 85% that bottomed at 209 in October 2002. A rebound to around 550 by late 2003 encountered resistance that took over a decade to surpass. The 2008 financial crisis triggered another sell-off, breaking through prior support and reaching a 12-year low.

A breakout in 2014 above the 2003 resistance led to over two years of consolidation at new support levels, followed by a secondary breakout after the 2016 presidential election. The index completed a full 100% retracement back to the 2000 peak in January 2018, then entered a sideways phase that broke short-term support in Q4, dropping to a 17-month low. This presented a historic buying opportunity ahead of a 2019 uptrend that stalled near 1,600 in April.

After overcoming resistance in October, the index launched a fresh rally, reaching an all-time high of 1,975 on January 24, coinciding with rising coronavirus concerns. The index then declined roughly 125 points in response, settling at a three-week low and surrendering most of its 2020 gains, leaving new investors in negative territory.

The monthly stochastic oscillator entered a long-term buy phase in January 2019 but shifted to a sell cycle by May. This selling pressure was brief, with the indicator rebounding to overbought levels by November. Currently, it is poised to finish the month with a bearish crossover, alongside a bearish shooting star candlestick on the monthly chart. While these signals are not definitive sell triggers yet, they advise traders to tighten stop-losses and consider taking partial profits.

Conclusion

The semiconductor index may have peaked following a robust rally marked by multiple record highs.

Disclosure: The author held no positions in the securities mentioned at the time of writing.

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