Selling pressure for chip stocks is nearing exhaustion, charts show
The market is ugly in here. Sentiment and positioning are heavily bearish. However, we need to remember that sustainable market lows form before sentiment and fundamental data improve. The old saying “it’s darkest before dawn ” very often applies to the markets. Last week’s column outlined the top three portfolio changes we made, including deploying inverse ETF hedges, cutting emerging markets and reducing holdings in gold stocks with increasing real interest rates. So yes, I’m drinking some of the bearish Kool-Aid too. But when I look at the semiconductors, I’m starting to see signs that we may be approaching peak bearishness and selling pressure nearing exhaustion. It may take one or two more negative headlines out of the Middle East to drive that final wave of selling and push markets into a true capitulation phase. The VanEck Semiconductor ETF (SMH) daily chart shows a decline from the February highs, but the shape of the correction is a standard A-B-C shape shown in the orange dashed lines. That’s the signature shape of a correction against the longer-term trend — up in the case. Notice that A-B-C correction dropped us into the yellow highlighted zone of a pivot of sorts around $360 to $370. Could it be a possible support zone? Finally, notice the SMH did not break below the 200-day moving average. In fact, it’s well above the 200-day moving average at around $350. Next let’s turn to a daily ratio chart of SMH/ S & P 500 (SPX) . This ratio chart shows the semiconductors relative to the S & P 500, and it tells a much more tempered, less bearish story of hardware and semiconductors relative to the broader market. You’ll notice a sideways correction that traced a triangle consolidation, which consists of lower-highs and higher-lows to form the sideways squeeze pattern. More times than not the consolidation pattern will break in the direction of the larger-degree trend, which is again higher. Also making the case for support is the red uptrend line since April 2025. Yes, I do believe in the long-term bullish artificial intelligence story that is changing the way we operate professionally and interact personally. But we also need to look at the current valuation of the semiconductors that have on a relative basis become very cheap. Even though earnings and expected earnings are growing, the market is paying less for those earnings, which is classic valuation compression. That compression comes from increasing interest rates, which in turn equal a higher discount rate. In other words, future earnings are worth less today. Here is the weekly price chart of Nvidia (NVDA) with the forward price-to-earnings ratio over the next twelve months currently trading at 20.5-times 2027 earnings per share. I’ve included the expected 2027 EPS and sales growth (black rectangles). Analysts are expecting $8.29 in earnings per share for all four quarters in 2027. If you divide NVDA’s share price of $170.24 by $8.29 that gives you a forward multiple of 20.53-times earnings. For context, the entire S & P 500 index is trading at a forward multiple around 19.7-times next year’s earnings. To make an extreme comparison, Costco (COST) is trading at 46-times next year’s expected earnings. Costco’s expected EPS growth in 2027 versus 2026 is 9.66%. NVDA’s 2027 versus 2026 EPS growth is 73.89% with gross margins in the high 70% range. So the question becomes simple: Would you rather pay 46-times earnings for a company growing under 10%, or roughly 20-times earnings for a company whose growth is closer to 70%? Finally, Nvidia’s forward multiple is sitting on a shelf of support that has been tested three times since 2018, this being the fourth. This is where combining fundamentals with technicals gives you an edge over those who are operating from emotional reactions to today’s scary geopolitical headlines. —Todd Gordon, Founder of Inside Edge Capital, LLC We offer active portfolio management and financial planning for retail investors, as well as regular market updates at www.InsideEdgeCapital.com DISCLOSURES: Gordon owns NVDA and COST personally and for clients in his wealth management company Inside Edge Capital, LLC. 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. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.