Chipmaker Stocks May Fall 10% Over the Short Term

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his client's own shares of SWKS company.)

Chipmakers had a rough week with shares of the iShares PHLX Semiconductor ETF (SOXX) falling sharply, over 6% in just two days of trading. The declines were set off after Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) reported a weak revenue outlook, renewing fears of weak Apple Inc. (AAPL) iPhone sales. Based on a technical analysis the ETF could fall nearly 10% further from its closing price of $172.22 on April 20, over the short term. (For more, see also: Apple's Stock Sharp Decline May Be an Overreaction.)

Over the past year, the Semiconductor sector has been one of the best performing groups, with shares of the PHLX semiconductor ETF climbing by over 27%, versus the S&P 500's rise of only 13%. 

SOXX data by YCharts

Critical Support Region

The PHLX Semiconductor ETF is signaling further declines ahead for the group over the short term, should the ETF break a significant technical support region between $167 and $167.30. Should the price of the ETF fall below that region of support, the ETF could decrease an additional 10% lower all the way towards $155.50, a level the ETF hasn't traded since September of 2017.  Until now the ETF has held the $167 support region on two prior pullbacks. 

Technical Divergence

The relative strength index (RSI) has been trending lower since November of 2017, while the sector and ETF have continued to rise to record highs. The divergence between the RSI and price is a bearish indication and suggests the price of the ETF may still have further to fall. This means the sector also has more to fall as well. (For related reading, see also: Why Chip Stocks Will Keep Rising.)

Broad-Base Selling

The selling in the sector over the past two days was broad-based within the top 25 holdings in PHLX Semiconductor ETF, with all 25 stocks lower.  The three biggest losers in the group were MKS Instruments Inc. (MKSI) falling by over 9%, while Skyworks Solutions Inc. (SWKS) and ON Semiconductor Corp. (ON) fell by over 7%. The selling in the group was indiscriminate, and that would suggest that investors were looking to get out of the group, and were not even rotating into other parts of the sector. 

(Data From Ycharts)

Upcoming Earnings

Apple is not expected to report results until May 1, which means the group could see further pressure until investors get some clarity regarding Apple's outlook. But in what could be a double-edged sword, heavyweight chip companies Intel Corp. (INTC), Qualcomm Inc. (QCOM) and Texas Instruments Inc. (TXN) are all expected to report results between April 25 and the 26, which could either help to calm nerves or accelerate fears, depending on the outlook given by the companies.  

The coming days will have a significant impact on whether chip stocks have further declines, or hold the critical support region and find a rebound. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the founder of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of two to three years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.