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Semiconductor ETFs Overbought: What to Do?

Semiconductor ETFs’ price momentum

The iShares PHLX Semiconductor ETF (SOXX) and the VanEck Vectors Semiconductor ETF (SMH) hit a new 52-week high on April 17 due to strong growth in Qualcomm (QCOM) and Intel (INTC). Qualcomm stock rose 38% between April 15 and 17, and Intel rose more than 5%. The moving averages of the two ETFs show technical strength.

This technical strength found support in heavy trading volume. On April 17, SOXX and SMH traded 46% and 44% above their average trading volumes. Let’s see what technical analysis says about these trading volumes.

Relative Strength Index

The RSI (Relative Strength Index) measures the intensity of investor sentiment by looking at trading volume and how it’s skewed—whether to the buy side or the sell side. The RSI is on a scale of 0 to 100, with less than 30 indicating that the stock is oversold and greater than 70 indicating that the stock is overbought.

On April 17, the RSIs for SMH and SOXX crossed over the 70 mark, indicating that trading activity was skewed on the buy side. As the two ETFs crossed the threshold, they’re now overbought. This is the first time in more than a year that the two ETFs have appeared overbought.

The last time SMH had an RSI above 70 was between January 18 and 23. The ETF rose 12.2% during this overbought period and was followed by significant sell activity, which sent the RSI close to oversold territory at 35 on February 8. This was the time the entire stock market saw a sell-off over concerns of a rise in interest rates at the Federal Reserve recently. The SPDR S&P 500 ETF (SPY) RSI fell below 30.

The current RSI of above 70 in semiconductor ETFs shows that the sector has revived from its 2018 weakness. When a stock is overbought, it sees some correction as traders cash in their profits. SMH and SOXX should see some corrections but—unlike in early 2018—the ETFs shouldn’t dip into the oversold category as the stock market has stabilized compared to last year.

If you’ve already invested in these two semiconductors ETFs, it might be a good time to sell and buy at the next dip.

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