Semiconductor Stocks Overbought with Onset of Q1 Earnings

Semiconductor stocks 

The VanEck Vectors Semiconductor ETF (SMH) hit a new 52-week high of $120.71 on April 24 as stocks of Xilinx (XLNX), Texas Instruments (TXN), Analog Devices (ADI), and KLA Corporation (KLAC) hit new 52-week highs. These stocks rose as investors reacted to the first-quarter earnings.

The above price movement shows there’s bullish sentiment in the semiconductor industry. A better measure to understand this bullish sentiment is the RSI (relative strength index).

Semiconductor Stocks Overbought with Onset of Q1 Earnings

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Relative strength index

The RSI measures the intensity of investor sentiment by looking at the trading volume and the side—that is, the buy side or sell side—it’s skewed toward. The RSI is measured on a scale of zero to 100 with less than 30 indicating that the stock is oversold and above 70 indicating that the stock is overbought.

On April 24, the RSI for SMH stood at 75, indicating that the ETF is overbought. The ETF has been trading above 70 since April 17 when Qualcomm (QCOM) and Apple (AAPL) settled their licensing dispute. Buying activity in SMH is supported by the upcoming first-quarter earnings releases.

Xilinx

Xilinx is trading at an RSI of 75 ahead of its fiscal 2019 fourth-quarter earnings. The stock is expected to rise by double digits post-earnings. So traders are buying in to cash out on this double-digit growth.

Analog chipmakers

In analog chip space, stocks of Analog Devices and Microchip (MCHP) crossed above the 70 RSI, whereas Texas Instrument and Maxim Integrated (MXIM) are trading slightly below 70, indicating buying momentum in the analog space. TXN and ADI even hit new 52-week highs.

SME suppliers

The buying activity was also strong among semiconductor manufacturing equipment suppliers with Applied Materials (AMAT) being overbought and KLA and Lam Research (LRCX) trading close to an RSI of 70.

This buying momentum will bring some correction in the semiconductor industry as the earnings season ends and traders betting on earnings exit their long position. For investors who have holdings in the above stocks, it’s a good time to cash out a portion of your holdings.

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