Semiconductor ETF Presents an Intriguing Chart

Over the course of the last five months, the market has seen increased volatility and almost all sectors have been impacted by the increase in volatility. The semiconductor sector hasn’t been excluded from the volatility, but the Market Vectors Semiconductor ETF (NYSE: SMH) may have some technical support that enters the picture.
The SMH hit a high of $52.08 in September before the overall market pulled back so sharply for four weeks. Once the market rallied back, the SMH went up to $55.99, pulled back to $52.32, rallied back up to$55.92 and then used the $52 area as support again during the first full week of January.
The top two holdings in the SMH are Intel (Nasdaq: INTC) and Taiwan Semiconductor (NYSE: TSM). Each reported earnings last week and that likely contributed to the volatility from the sector. In the next four weeks, five more of the top 10 holdings in the SMH will report earnings and this could lead to more volatile trade.
With the way the daily chart looks right now, a move above $56 would look good for a bullish position while a break below $52 would look like a good place to enter a bearish position.
One thing that would concern me about going long the SMH right now is how overbought the ETF is based on the monthly chart. The monthly slow stochastic readings have been in overbought territory for the better part of two years now, as has the 10-month RSI. The RSI recently hit its highest level since early 2000.
Until the recent move, the SMH had not been above the $55 level since October 2000 and that was as it was retreating from the tech-driven bull market high of $87.70 that came in March 2000.
Looking at the sentiment toward the SMH itself and the top holdings, we see a somewhat bearishly skewed sentiment picture. The short interest ratio for the SMH is currently 5.6 and the average short interest ratio for the top five holdings is 5.3. The put/call ratio for the SMH is currently higher than 96% of the readings for the past year and the average percentile rank for the put/call ratio of the top five holdings is 71%. Even the analyst rankings show a degree of bearishness as there are 53 “hold” ratings and 15 “sell” ratings on the top five holdings compared to 63 “buy” ratings.
Given the way the SMH has jumped over the last six years and seeing how overbought it is, I am surprised to see so much pessimism toward the ETF and toward the stocks in the sector. However, from a contrarian viewpoint, that could be a good sign for the SMH and the possibility of it moving higher in the months ahead. That being said, I wouldn’t do anything in the $52-$56 range and would wait for a move above $56 before I would go long.

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