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Semiconductor Bull Run: more steam ahead, but take cautionSome industries are notoriously cyclical. Semiconductor is a prime example. It swings to the extreme on both bullish and bearish sides. While the industry is in a bull run, investors can still participate in its rise but with caution. The PHLX Semiconductor Index (“SOX”) is a modified market-cap weighted index. It is composed of semiconductor firms involved in the design, production, and distribution. This paper dives into the factor’s driving SOX performance. It expounds on the cyclical nature of the industry, and its outlook fuelled by AI frenzy. Finally, this note posits a hypothetical spread trade to gain from index outperformance relative to the broader market. The spread has been found to be more resilient that an outright position in SOX ETF or futures. UBIQUITOUS AI AI here. AI there. AI everywhere. AI by far is the single most driver of SOX outperformance. VANTAGE:NVIDIA , the AI darling commands ~10% of the SOX. Other AI majors include Broadcom (9.3% weight) and chip equipment maker ASML (4.5% weight). The strongest profit harvester of AI boost is Nvidia. Expectedly, it has strongly outperformed SOX. AI-driven demand is evident in its financials. In 2023, its revenues rose by 125% YoY while Net income spiked by a jaw-dropping 580%. Consistent earnings beat-and-raise has propelled its stock prices to more than 500% gain since the start of 2023. Outsized impact of Nvidia’s earnings is from AI data centre sales. AI NOW, AND MORE IN THE FUTURE. Nvidia is clearly benefiting in the near-term. Other majors are ramping up their AI offerings. Notable among them are NASDAQ:AMD (9.8% weight in SOX), VANTAGE:INTEL (6.75%), and $Qualcomm (7.5%). These firms are yet to witness a major AI driven boost. 2023 data centre revenue for these firms remained underwhelming relative to AI winners such as Nvidia and Broadcom. Broadcom’s AI driven demand for its networking solutions led to revenue of USD 2.3 billion in Q1 2024 which represents a four-fold increase YoY, reported MarketWatch. For 2024, they forecast AI-driven sales to reach USD 10 billion. Data Source: TradingView Meanwhile, Intel, AMD, and Qualcomm are in the process of launching their own AI offerings. Qualcomm’s updated Snapdragon X Elite chips runs on ARM architecture. These offer enhanced AI capabilities, energy efficiency & performance compared to current platforms from Intel and AMD. AMD updated its guidance for AI graphics offerings to USD 3.5 billion this year (v/s two billion previously). Although, below expectations, the raised outlook signals that sales ramp up is yet to materialize. Intel is planning to launch AI PCs. Uniquely, in such PCs, AI inference will be localized on the user’s machines rather than on the cloud. Like Qualcomm, Intel’s AI PCs may revive its faltering PC sales. NEXT TO AI, REBOUND IN MOBILE PHONE SALES IS HELPING THE INDUSTRY Beyond AI driven demand, rebound in smartphone sales highlighted by Counterpoint Research has helped change the fortunes of this industry. Final quarter of last year marked the first quarter of annual growth after 7 straight quarters of declining sales volume as per their report . Smartphone sales rebound benefits not just mobile chip makers like Qualcomm but also manufacturing service providers like TSMC. SEMICONDUCTOR INDUSTRY IS NOTORIOUSLY CYCLICAL. FORTUNATELY, BULL CYCLE FOR NOW. Semiconductor industry is prone to cyclicality. It is impacted by idiosyncratic consumption patterns. As a result, industry runs into large inventory buildups resulting in gluts for outdated products and shortages for new ones. Due to the rapid innovation rate, production sizing is hard. Even harder is for manufacturing output to adjust to shifting demand dynamics. Cyclicality is on over-drive these few years. Pandemic disrupted chip production while demand remained robust. Subsequent shortage impacted not just semiconductor firms but also various other industries reliant on chips. Manufacturers ramped up production to meet high demand. Soaring inflation drove central banks to raise interest rates. This caused consumer spending, especially on discretionary electronic items to nose-dive. This dynamic rapidly drove chip inventories from a severe shortage to demand crushing glut. What followed was painful mark-downs and profit crushing unit sale declines. Cyclicality is ingrained in this industry due to its consumption, innovation, and growth cycles. As an example, consider VANTAGE:INTEL ’s revenue and profit. VANTAGE:INTEL derives majority of its revenue (54% in 2023) from its Client Computing division comprising of consumer-focused processors. The impact of seasonality is also palpable in the net income of memory manufacturer $Micron. HYPOTHETICAL TRADE SETUP Robust financial performance is evident for some stocks within SOX. Other names within SOX are yet to reap the harvest of top-line and bottom-line growth from AI. Notwithstanding, SOX continues to rise. It is up +100% relative to the start of 2023 when AI-driven hype came to the fore. Over exuberance and risks of a bubble are clear. A macro slowdown or industry-specific setback could drive a sharp reversal in SOX. Instead of an outright position in SOX ETF or Futures, spreads between SOX and other equity indices shows that SOX/S&P 500 spread makes for a compelling hypothetical trade setup. SOX/S&P 500 spread offers improved upside relative to SOX/Nasdaq-100 and SOX/XLK spread. It also offers resilient performance during sharp corrections (August to November 2023). The SOX/S&P 500 spread is 36% higher since the start of 2023 and close to its highest level seen during 1995 and 2000. For reference, the SOX index is up 80% from 2023 and soaring far above previous all-time-highs. This implies that much of the recent run-up in SOX has come alongside a broader rally in the S&P 500. SOX outperformance is likely to continue while SOX tailwinds remain intact. A hypothetical spread trade comprising of two lots of long CME E-Mini PHLX Semiconductor Sector Futures (“SOX Futures”) and short one lot of CME E-Mini S&P 500 Futures can offer a reward to risk ratio of 1.5x. Two contracts of SOX Futures are required to match the notional for one contract of E-Mini S&P 500 futures. • Entry: 0.927 • Target: 0.97275 • Stop Loss: 0.897 • Profit at Target: USD 11,783 (+4.9%) • Loss at Stop: - USD 7,893 (-3.3%) • Reward to Risk: 1.5x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME_MINI:SOX1!Long
by mintdotfinance
Semiconductor Pullback Imminent?The semiconductor index has been one of the best performing areas of the market over the last few quaters, and has continued to be strong since the late October bottom. The index is coming into overhead fibonacci resistance, and with weakening momentum starting to show up, similar to July last year, a pullback here looks likely. It seems hard to imagine with all of the AI lead optimism, but this sector could see some retrace back to the 3100s to reset sentiment. If the indicated resistance region is broken, the next likely targets are substantially higher. Will be monitoring for a reversal pattern to emerge and confirm the time has come to exit longs and consider a short trade.
TVC:SOXShort
by CycleTargets
SMH ELLIOT WAVE STRUCTURE WAVE 5 of 3 ended165.5The chart posted can now be posted and the ew labeling we have now ended or will end wave 5 of 5 of wave 3 top and begin a sharp drop in thr sox and smh back down for a week or more in wave 4 of 5 of 5 then The last wave up will end the rally from oct 13 th 2022 in super cycle degree and we will then see a drop back to .382 to 50 % from 2009 once more in wave A of the super cycle bear POINT for reference see 1998 to 2000 Internet BUBBLE A.I Bubble
NASDAQ:SMH
by wavetimer
SOX : Trendline to watch!!!!Trendline to watch!!!! Indeed, the “SOX” semiconductor index, known as a leading indicator, seems to be showing signs of weakness. Although it has returned to its uptrend line, we can still be wary of Wolfe waves which indicate a possible breakout. Not to mention that major components like “Intel” or “Nvidia” are either very high and overvalued (Nvidia), or have experienced a fairly phenomenal series of consecutive increases (Intel). Breaking the uptrend could be a negative signal for technology and especially for the market as a whole.
TVC:SOXShort
by Le-Loup-de-Zurich
1
SPY Update (weekly chart)Quite a bull run, last week we hit the Point & figure (P&F) target of 443 set long ago. The current run appears over-extended, being at the top of the channel set from the October 2022 low to present. Also, the RSI(9) on daily and RSI(12) on weekly (neither shown here) are overbought. The B to C run at 1.68 % extension also is showing some excess over the theoretical Gartley 1.618 move. Also, SOX and SMH are showing some signs of rolling over. After touching the 443 P&F target, the week fell back and closed out at 439.46, below the APEX of the volume profile (red arrow on the right). Potential resistance. I am liking the prospects of a pullback next week from C to D to 412.26, or around the 50% retrace line (drawn from 2022 high to low) at 414.04. That would be about 6% pullback. Of course, the bull run could continue next week, at which point I would expect an intermediate top out at 454.05, or prior swing high. Given paragraphs 2 and 3 above, I don't expect this next week. Are we in a new bull market? We are getting there, but I remain cautious.
AMEX:SPY
by UnknownUnicorn13101
2
SMH Weekly Update (post split)I'm updating my prior SMH weekly chart, since we had a 2 for 1 split in SMH last week and it totally messed my chart up. Key points (dates are all weekly): 3/27: 131.79 (most recent peak) 4/24: 118.57 ( most recent low) -10.03% off the peak 5/1 close: 124.38 -5.6% off the peak Gann confluence line 1: 121.71 -7.6% off peak Gann confluence line 2: 114.46 -13.1% off peak The green trend lines indicate an apex forming right along the Gann rays (salmon colored lines) suggesting a directional resolution is near. After extending to the purple point D, which is almost a 1.218 Gartley extension, support appears to be holding at the 121.71 Gann Confluence support line. This line is also the top ridge of the Ichimoku cloud which can also serve as support. Should SMH rise off this support, then we would have had a 7.6% correction off the most recent high. Should current support break down, we would see a target of Gann support 2 which is 114.46, or 13.1% off most recent peak. Pros for upside breakout: A possible rate cut currently being predicted by SOFR futures as early as June or July. Banking turmoil could also call for a pause or cut. A reduction in rates would also signal easier monetary conditions which would benefit growth oriented stocks for a near term spike. Pros for a breakdown: Further hawkishness in the FED, combined with Bank Solvency fears. Seasonality: from 2004 to 2023 the SMH has finished the month of June higher only 42% of the time, the worst month in the year. Observation: The 12 month RSI, while positive at 57.16, is declining from a near term double top, and showing some weakness in trend. I would watch for continuing weakness in SMH momentum on the daily chart, as well as the breadth inside the SMH holdings. You can do this with flipcharts on the Barchart.com site. Presently, while I see a few stalwarts, I am also seeing a lot of breakdowns inside the SMH ETF. For example, MCHP, a very well run company with solid financials, just reported good earnings beats, yet it sank below its 200 day MA and has a weak daily RSI(9) of 42.11. Personally, I would not long any semiconductors until late summer and signs of turmoil have resolved.
NASDAQ:SMH
by UnknownUnicorn13101
SMH Semiconductors update (weekly) Key areas to watch Semiconductors finally showing some topping pattern, amidst topping RSI (12) that failed to reach the high 70 channel and a shrinking trend of volume. In effect, weakening momentum. The first level is 244.71, which is a Gann confluence and also a prior pivot (left yellow circle), and is a 7.1% decline off the most recent peak of 263.57. This would take it to the top of the red cloud which could serve as some support. The second level to watch is 229.18 (right yellow circle) , which is another Gann Confluence, and also a prior pivot, which would be 13.04% off the peak of 263.57. This would take SMH well into the cloud, which could create some future resistance. Seasonality is at play, so I would expect a rebound in late summer, although there are many factors which could disrupt any projections any farther out and I do not feel worth making now.
NASDAQ:SMH
by UnknownUnicorn13101
TLT 4 TH WAVE TRIANGLE ENDING DOWNSIDE 85Iam posting the chart as a new Warning to All traders I see this as nearing it s end . I will state if this wave structure turns down from the time window we are entering into my panic cycle May panic and panic low june 16 to the 23 th 2023 is the next spiral as stated jan 20th 2023 forecast . the Importance of the march 13 /23 spirals back to june 13th 1949 plus the other 3 spirals are a cluster at each cluster of spirals events have occurred MARCH 13 2023 AUGUST 16TH 2022 OCT 13TH 2022 SEPT 6TH 2021 AND MY MARCH 18TH TO THE 21 ST 2020 . .BEST OF TRADES WAVETIMER !!!
NASDAQ:TLTShort
by wavetimer
2
AMD is approaching resistance (daily chart)AMD, like many semis, has been on a rip lately. However, it appears to be in a resistance zone at a Gann confluence line at 100.13 (like SMH and many other semis), which is also where it turned back earlier. The RSI(9) is overbought. I would see it going back to prior Gann line at 91.23. That line is also near the top of a bullish Ichimoku cloud. Perhaps a buy there, but I would be cautious about buying semis after April, since we may be entering some seasonality.
NASDAQ:AMD
by UnknownUnicorn13101
When Chips Are Down, They Rebound Slowly But StronglyWhen Chips are down; invest if you can and hedge if you must. Having soared in 2020 & 2021, semiconductor shares tanked brutally as tremors from geopolitics, sinking consumer confidence and bloated inventory struck. Q4 overhang is dragging the industry down in the near term, which might have set a bearish outlook in the short-term, but times are changing. Structural forces and business cyclicality are now becoming robust tail winds for semiconductors, bringing a bullish outlook in the medium-to-long term for the sector. Therefore, this case study argues that an asynchronous time spread in CME E-Mini PHLX Semiconductor Sector Futures ("CME Semiconductor Futures") could potentially deliver a 2.8x reward to risk ratio by first taking a short position in futures expiring in March 2023 followed by a path-dependant long position in futures expiring in September 2023. INDUSTRY ON THE CUSP OF A SUPERCYCLE Chips everywhere. Semiconductors are ubiquitous as products become sophisticated. Rapid growth of mobile devices, emergence of EVs, and rising cloud adoption have created endless demand for higher processing speeds and larger memory. Chipmakers have benefited from this trend. Anticipated exponential growth in consumer durables, IoT, gaming, EVs, and AI/ML will translate into strong sustained demand for chips. Speaking at World Economic Forum, Microsoft CEO Satya Nadella asserted that AI would go mainstream not in years but in months. Emergence of generative AI will form a fresh stream of demand for chips. EVs require twice as much chip content than traditional ones. Rising cloud usage will amplify demand from datacentres for graphics processing units (GPUs). In short, semiconductor industry is on the cusp of a demand super cycle. DEMYSTIFYING THE SEMICONDUCTOR INDEX The Philadelphia Semiconductor Index ("SOX") is a market capitalization-weighted index comprising of the top thirty (30) semiconductor firms listed in the US. Top names include Nvidia, TSMC, and ASML forming 48% of SOX. The top ten comprise 80% of the SOX. SOX rallied 202% from its low in March 2020 to its high in November 2021. As monetary policy shifted from QE to QT, SOX plunged 46% in 2022 touching its lowest level in October 2022. Since then, it has bounced back 43%, outperforming both NASDAQ-100 and S&P 500 which are up merely 10% during the same period. A CYCLICAL INDUSTRY Semiconductors industry is inherently cyclical given the considerable time lapse between spotting fresh demand and matching them with new supply. In a recent report, JP Morgan cited that semiconductor stocks are close to a cyclical bottom. Each time the industry hits a bottom, it recovers impressively. In one-year and three-years following a cyclical dip, shares in this sector spike 40% and 95% on average, respectively. While short term demand looks bleak on waning consumer confidence, the USD 600-billion industry's long-term prospect looks resolutely bright. LET THE AI WARS BEGIN Revolutionary AI: ChatGPT made its debut in November. It sprinted to a million users in just five days. The excitement in generative AI is palpable. It will revolutionise content generation while delivering vast productivity gains in others. Inflection ahead: AI is approaching an inflection point. Its usage is going mainstream. Expect tech giants to invest heavily to outcompete. If this marks the start of AI wars, the semiconductor firms that make AI work will harvest outsized profits. Shovel makers hit jackpot: During the gold rush, it was the shovel makers that got rich more so than the diggers. In this AI gold rush, the shovel makers (i.e., the semiconductor stocks) are set to reap enormous gains. Nvidia already shining: Nvidia is the market leader in GPUs whose parallel processing capabilities form the core for delivering AI. ChatGPT adoption alone could bring incremental revenues of up to USD 11 billion over the next year, Citigroup estimates. TSMC & ASML well positioned: Nvidia GPU production depends on two firms - (a) the Taiwan Semiconductor Manufacturing Corporation (TSMC), and (b) ASML Holdings (ASML). Berkshire stake in TSMC: TSMC recently announced stunning Q4 earnings. Its net sales grew 42.8% YoY, while its net profits & EPS were up 78% YoY contributing to an ROE of 26.4%. Little wonder that TSMC was one of Warren Buffett's recent investments where his firm acquired USD four billion of TSMC shares last November. ASML dominance: Meanwhile ASML commands a monopoly on key tech (Extreme Ultraviolet Lithography or EUV). EUV is used in producing cutting-edge nano chips that AI requires. ASML is set to secure a windfall on rising AI adoption. CHIPS ACT TO RESHORE PRODUCTION Supply chain disruptions caused by the pandemic exposed the vulnerability of over-reliance on globalisation. Russia-Ukraine conflict caused adverse impact with Russia being a major supplier of Palladium and Ukraine being a key source of Neon gas. To reduce over-reliance in a key industry, US last year legislated the CHIPS Act which is aimed at reshoring production on US soil supported by more than USD 150 billion of grants and tax incentives. NO PAIN, NO GAIN IN A V-SHAPED PATH AHEAD Supply ramped-up but a little too late: Clogged supply chains plus demand spike during the pandemic fuelled chip shortage. Ramped up production which always takes a long lead time arrived but at a time of pale consumer demand (PC demand down 28% YoY) late last year. Frail consumer sentiment: Persistent inflation, recession fears, and uncertain outlook, meant lower consumer durable sales. This has slashed demand for semiconductors resulting in one of the largest inventory corrections in the industry. The sector is cooling faster and getting colder than expected. Firms face a tough market saddled with excess inventory compounded by frail end-markets except for automotives. Downgraded chips: Intel reported a loss for Q4 last year and expects a weak first half this year with return to growth in second half. Earnings from other industry majors point to significant headwinds. Analysts have downgraded several chip stocks. Fund flows in ETFs: Fund flows into and out of leveraged ETFs this year show investor activity is moving in tandem with these macro shifts. The Direxion Daily Semiconductor Bull 3x ETF (3 times long exposure to SOX) suffered net outflows of $341 million while the Direxion Daily Semiconductor Bear 3x ETF (3 times short exposure to SOX) gained net inflows of $1.1 billion. Insiders are Net Sellers: Insider Activity among majors show that they have been net sellers over the last three months except for Qualcomm, Intel and Applied Materials. Bullish Price Targets: In sharp contrast to this gloomy outlook, analysts covering the top stocks anticipate an average +15% price gain over the next 12-months. TRADE SET-UP This case study proposes a two-legged calendar spread as set out below. Each CME Semiconductor Futures contract provides exposure to twenty-five (25) index points approximating to USD 75,000 in notional with required margin of USD 5,900. TRADE LEG 1 : A short position in the contract expiring in March 2023 will provide exposure to the short-term correction. Entry: 2978 Target: 2571 Stop Loss: 3180 Profit At Target: $10,175 Loss At Stop: $5,050 TRADE LEG 2 : A long position in CME Semiconductor Futures expiring in September 2023 will provide exposure to recovery in the latter part of the year. Entry: 2710 Target: 3718 Stop Loss: 2410 Profit At Target: $25,200 Loss At Stop: $7,500 Aggregate Reward-Risk Ratio: 2.8x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. This material has been published for general education and circulation only. It does not offer or solicit to buy or sell and does not address specific investment or risk management objectives, financial situation, or needs of any person. Advice should be sought from a financial advisor regarding the suitability of any investment or risk management product before investing or adopting any investment or hedging strategies. Past performance is not indicative of future performance. All examples used in this workshop are hypothetical and are used for explanation purposes only. Contents in this material is not investment advice and/or may or may not be the results of actual market experience. Mint Finance does not endorse or shall not be liable for the content of information provided by third parties. Use of and/or reliance on such information is entirely at the reader’s own risk. These materials are not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject Mint Finance to any registration or licensing requirement.
TVC:SOXLong
by mintdotfinance
2
XLK Update (daily chart)XLK is at a key area of resistance at Gann 145.11. It either breaks through this resistance next week to seek the Gartley 1.618 extension near the Gann line (151.77), or it repels downward to form a short term double top. I note that SOX index appears to be at a level of resistance, although it's ETF counterpart SMH appears in the clear above the Ichimoku cloud. I would watch the RSI (9) trend, which took a turn downward on Friday, although I'm discounting that observation a little since Friday was a weird day with options expiration. XLK is worth watching, since it is one of the few S&P sectors that is currently showing strength.
AMEX:XLK
by UnknownUnicorn13101
SOX Update (weekly chart)SOX, as well as the broader XLK, has diverged somewhat from SPY, and remains stubbornly above the 52 week EMA. The red D point is a longer term Gartley target based on a 61.8% retrace from point C. However, it is still in an Ichimoku resistance area, and has potential to reverse. Key support areas are; 1) 2854 -2794 DOJI, and potential pivot area 2) 2848-2742 Blue Point B, a prior swing high and potential pivot area 3) 2838 Gann Confluence Point and potential support Should pivot areas 1) and 2) above fail, the final point to watch is the Gann Confluence around 2838. A fail below this point would be bearish. Also, an extended stay below the 52 week EMA would be bearish. Presently the chart sits above the longer term downtrend set from 1/22 high to 10//22 low and has a ways to go before that channel should continue.
NASDAQ:SOX
by UnknownUnicorn13101
1