SOXX: Ingrained Massive Pessimism (NASDAQ: SOXX)

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Investment thesis

The iShares Semiconductor ETF (NASDAQ:SOXX) offers semiconductor investors a well-diversified approach to investing in semiconductors. As a result, investors can gain exposure to most of the semi-value chain, from cutting-edge chip designers to cutting-edge chipmakers. Therefore, some technologies investors are considering adding exposure to SOXX as a core ETF to help participate in semi-stocks they don’t have exposure to.

Despite this, the SOXX has also been beaten since the start of 2022, as many of its component stocks have been pummeled. As a result, the SOXX is down nearly 28% year-to-date (as of May 25) and remains deeply entrenched in bearish momentum. Our analysis of the price action also suggests that the SOXX may struggle in the near term as a reversal of the bearish trap remains elusive. Therefore, we urge investors to watch its price action carefully for signs of a potential reversal.

We discuss critical support levels for semi-investors to watch, which could also portend a much-anticipated reversal for the underlying stocks of his holdings.

Six of its top ten holdings are in a bear market

The top ten holdings of SOXX (1/2)

Top Ten SOXX Holdings (1/2) (koyfin)

The top ten holdings of SOXX (2/2)

Top Ten SOXX Holdings (2/2) (koyfin)

With six of SOXX’s top ten holdings limping in a bear market decline, it’s easy to see why the ETF has also taken a big hit. Notably, its 2020-21 top performers, NVIDIA (NVDA) and AMD (AMD), were significantly beaten as market makers digested their massive gains over the past two years. Even SOXX’s main holding company, Broadcom (AVGO), could not escape the clutches of the bears as investors quickly digested its gains.

Bull traps were cleverly set in November and March

SOXX Price Chart

SOXX Price Chart (TradingView)

A closer inspection of SOXX’s price action reveals two startling revelations. The rally from the COVID bottom in March 2020 had a two-month “final push” from September to November 2021. This culminated in a consolidation zone seen above, resulting in a nifty bull trap. Because of the trap, we were then able to deduce that the consolidation zone was a distribution phase.

NVDA Pricing Chart

NVDA Price Chart (TradingView)

We also reported to members of our service in early November that we had observed a remarkable bull trap in NVDA stock that alarmed us. Accordingly, we have articulated (edited):

NVIDIA stock is starting to show signs of potential bullish price action. We regularly added NVDA on withdrawals, and also at the end of last year until May of this year. However, once the price started to move quickly afterwards, NVDA didn’t look so cheap anymore. Recent price spikes have taken it into well overvalued areas. Coupled with potential bullish trap price action, it calls for increased caution. (Ultimate Growth Investing Service November 5, 2021 Daily Market Analysis)

Readers can observe the significant price rally that quickly drew buyers to NVDA stock following its fall 2021 GTC conference. fallen directly into the trap of market makers. Notably, the November bull trap was also prominent in the SOXX. Therefore, SOXX investors should also pay close attention to analyzing the price action of its underlying stocks. They could reveal critical clues that could portend notable changes in the ETF’s momentum.

Also, the bull trap set in March was the straw that broke the camel’s back. It has established the critical resistance level to help push the SOXX into “negative flux” and its ensuing bearish momentum.

Currently, the SOXX is still trapped in bearish momentum with no sign of a bearish trap reversal price action signal. Nonetheless, it appears to be testing its short-term support level at $390. However, it is still too early to know if this level of support could hold. Given its bearish momentum, we would be waiting for a reversal signal from the double bottom price action that may preclude an eventual end to its affliction.

Alternatively, market makers may force it down to the $286 level (an implied 27% decline from the current price) before a potential reversal of the downside trap. Therefore, SOXX investors should observe these two levels before considering overlaying accordingly.

Is the SOXX ETF a buy, sell or hold?

We rate SOXX as a suspension at this time.. We are still waiting for a reversal signal from the downside trap which could help us validate a potential dip in its downside momentum. However, we have yet to observe one.

Notably, the median semiconductor P/E ratio normalized significantly to 19.6x, well below its 10-year average of 24.6x. Therefore, we believe its more reasonable valuation supports our analysis of the price action that the bottom could be within the two critical support levels shown above.

About William G.

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