Are Semiconductors Topping Out?

by: John Henderson

As the Nasdaq moved to fresh 52 week highs two days ago, the semiconductors failed to confirm this move to new highs. After having recently broken back above their 50 Day SMA, the inability of the semiconductors to move to new highs alongside the Nasdaq is a negative divergence. Having been a big leadership group for the Nasdaq since equities bottomed in March, this recent negative action in the group bears watching in here with a potential top possibly being put in.

It will be interesting to see how the group acts today after being downgraded this morning by Bank of America Merrill Lynch. Citing "a period of rapid replenishment of inventory and normalization of semi shipments to 'true' consumption levels, inventories in the supply chain are approaching a level suggesting a modest overshoot vs. equilibrium levels," the broker said. INTC, TXN, MRVL, & LSI-OLD were cut to neutral from a buy rating while MXIM, NSM, POWI, & MCHP were cut to underperform from a neutral rating.

Not surprisingly, the charts on all of the aforementioned chip plays seem to all have the same chart patterns. All of these stocks have recently moved back above their 50 day SMAs. TXN is the only stock in this group to have recently made fresh 52 week highs. POWI and INTC's charts look the best after TXN with MXIM and NSM's charts appearing to be in trouble.

While not short any stocks in the chip sector yet, it seems as though the winners and the losers in the group have begun distinguishing themselves. With some patience and perseverance a few could ultimately become good short sale candidates as the moving averages move into positions where supply seems ready to overtake demand.

Disclosure: No position in any of the semiconductor stocks mentioned in this article.