Semiconductors Break Their Longest Winning Streak Ever

Semiconductors finally posted a red day in April yesterday, declining 1.4% and breaking an 18-day winning streak, their longest ever. As Bob Farrell taught us, “Parabolic advances usually go further than you think, but they do not correct by going sideways.”

So, is there significant downside risk in the market’s hottest group? Today, we’ll look at just how overbought the industry is relative to historical extremes, and why investors should likely be scaling out, not in, to these stocks.

Note: We’ll reference both SOXX and the PHLX Semiconductor Index throughout. I prefer charting investable ETFs, but none of the major semiconductor ETFs predate 2000. Prior to June 2021, SOXX tracked the PHLX Semiconductor Index; it now tracks the NYSE Semiconductor Index.

The SOXX Winning Streak Stops at 18

The SPDR S&P Semiconductor ETF (SOXX) finally saw a daily decline to start this week, its first since the March 30 low. That’s the longest this ETF has had on record, and longer than the PHLX Semiconductor Index ever had during the dot-com bubble.

Sponsor Message From Author, Scott Brown, CMT:

+49% in 18 days Bests Anything Seen in the Dot-com Bubble

So just how much did SOXX gain during that 18-day win streak? An astonishing 49%. That bests any 18-day run the PHLX Semiconductor Index saw during the dot-com bubble. Coincidence or not, the best 18-day run the index saw on the way up was +44%, and that helped mark the exact top in March 2000.

Most Stretched from the 50-day Since 2002

One of my favorite ways to measure extreme overbought/oversold conditions is relative to moving averages, because they help to adjust for trend and volatility. Relative to its 50-DMA, SOXX is the most stretched from trend since coming off the 2002 lows, exceeding anything we’ve seen since, including the post-Covid tech/SPAC bubble or the 2023-2024 initial AI boom driven by Nvidia.

It’s Not the Dot-com Bubble. But it’s Clearly in the #2 Spot

While the April surge is unlike anything we saw in the late 1990s, I want to make it clear that I don’t think the move is as extreme. The biggest difference is the longevity of that move, as we saw semiconductors rise more than 600% in just over two and a half years, while the current gain from last April’s lows is just over 200%. Relative to a longer-term moving average, SOXX is 50% above its 200-day, a statistical extreme to be sure, but less than half of the reading that the PHLX Semiconductor Index topped out at in the dot-com bubble (107% above).

Where Do We Go from Here?

It may not be the late 1990s, but looking back at history, it’s hard to find any other period that comes close to what we’ve seen recently. At best, the recent move should be considered a buyer’s frenzy, and that’s rarely a sustainable move or ideal buying opportunity for those hoping for continued outperformance.

Short-term, I’m watching the 5-day moving average. Yesterday’s decline may have broken the winning streak, but this metric has acted as support all the way up, and still hasn’t been broken. A move below would be a more concrete sign that the parabolic advance is over and a consolidation is underway.

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