The semiconductor industry caught fire earlier this year, with stocks in the VanEck Semiconductor ETF (SMH) being gobbled up faster than we’ve seen since the dot-com bubble burst. Just a 26-stock ETF, SMH is a “who’s who” of popular stocks. And those huge asset flows have returned, at least for now, as traders sense a bargain.
www.barchart.com As semiconductor equities experienced recent selling pressure, retail and institutional allocations into the VanEck Semiconductor ETF have accelerated. According to a historical study by Renaissance Macro Research (RenMac) analyzing 65-day fund flows against forward 63-day relative returns from 2016 through 2026, this surge in capital inflows during a drawdown creates a statistical setup that diverges from historical market bottoms.
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Still, the way things have worked over time, true market bottoms historically form on capitulation and fear, whereas aggressive dip-buying reflects persistent optimism.
If that history repeats itself here, we’ll see more downside. But for now, there’s a fighting chance this trade gets some legs.
www.barchart.com RenMac’s decade-long dataset tracks fund flow percentiles to evaluate forward probabilities for the semiconductor sector.
When 65-day fund flows into SMH reach the top 10% of historical readings during price weakness, the ETF generated positive relative returns over the following 63 trading days only 29% of the time. Across 68 historical occurrences, the setup yielded 20 positive periods versus 48 negative periods, with an average loss of 5.9% on losing trades. Conversely, periods marked by heavy capital flight (10th percentile inflows) produced positive 63-day forward returns 51% of the time, generating 28 wins against 27 losses with an average gain of 7.3%.
I’m a chartist to the core, aided mightily by Barchart’s robust and easy-to-use technical tools. And to me, this shows bounce, if anything. Not a total turnaround or “bottom.” I point to that chart above, where the selling pace has slowed a bit. But in the same way a car doesn’t go from zero to 60 and then just as quickly reverse, it will take a lot more than an initial batch of brave retail investors to turn this tide.
Despite high-profile earnings beats from major memory and foundry producers, broad market participants continue to treat price dips as buying opportunities. This behavior prevents the valuation compression and order-book clearing typically required to establish a durable market floor.
www.barchart.com And, that old line about trees not growing to the sky applies here. At 50x trailing earnings, this set of stocks is priced for perfection. And as I’ve seen in the past, particularly with this group back in 2000, a 5-year return of 325% is enough to give me pause.
www.barchart.com That’s my current view based on the chart above. The daily view I showed earlier says there’s a chance for emboldened SMH bulls. But that 20-week moving average up top, and percentage price oscillator (PPO) indicator below, are more than a sign of caution. They are a signal to me that bounces can be exciting, but should be assumed to be just that – bounces – until the recent technical damage is more thoroughly reversed. I do not see that yet.
Rob Isbitts is a semi-retired CIO, former fiduciary investment advisor, and Barchart columnist. Check out his other work at ETFYourself.com (featuring the Fresh Charts weekly trading post), and ROAR.PiTrade.com, helping investors to better-manage their own portfolios.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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