The charts show semiconductor stocks are vulnerable to a big pullback, says Katie Stockton
Semiconductor stocks have been a pocket of strength within the technology sector in Q1, with the VanEck Semiconductor ETF (SMH) outperforming the S & P 500 Index by around 7 percentage points year to date. However, our work suggests semiconductor stocks are vulnerable to a period of downside leadership in the short term and potentially the long term. SMH’s secular uptrend shows signs of long-term upside exhaustion per Tom DeMark’s TD Combo model, supporting a nine-month corrective phase. The past two “sell” signals from this model were timely indications of cyclical corrections in late 2021 and mid-2024. Long-term upside momentum waned in March, as shown by a downtick in the monthly MACD histogram. This is the first downtick since the April 2025 low and serves as an indication that the cyclical uptrend in SMH is losing steam. The ratio of SMH to the SPX shows a significant loss of intermediate-term momentum, suggesting semiconductor stocks will be out of favor over the next several weeks. The weekly MACD on the ratio has its first downturn since Q1 of last year, which preceded a major correction for semiconductor stocks and the broader market. Taiwan Semiconductor Manufacturing is a global bellwether and the second-largest holding in SMH at nearly 12% of the ETF. The stock has a fresh breakdown below the daily cloud model in a bearish intermediate-term shift. Short-term downside risk is framed by support from a 38.2% Fibonacci retracement near $293 and the rising 200-day MA. Secondary support is below $232. Like SMH, TSM shows deterioration in our long-term indicators as a headwind for the rest of the year. The outlook for TSM relative to the SPX mirrors SMH’s relative setup, suggesting the stock will be a source of downside leadership during the corrective phase for equities. Semiconductor stocks tend to lead in both uptrends and downtrends, so we view the loss of relative strength for SMH and its constituents as a bearish development for the major indices. Investors should be wary given the bearish technical catalysts in former leaders like TSM and signs of long-term upside exhaustion across the sector. —Katie Stockton with Will Tamplin Access research from Fairlead Strategies for free here . DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. 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