After enjoying market-beating gains over the past three months, semiconductor stocks have taken a bath in recent trading sessions on the back of warnings about weakening prices for memory chips. Earlier this week, market intelligence provider TrendForce warned that prices for chips used in personal computers–known as DRAM–will fall by up to 5% in the December quarter.
Investment bank Morgan Stanley (MS) added to the bearish sentiment about the semiconductor group on Thursday, cautioning about a cyclical downturn in memory chips starting in the first quarter of 2022. “Our cycle indicator has shifted out of ‘midcycle’ to ‘late-cycle’ for the first time since 2019, and this phase change has historically meant a challenging backdrop for forward returns,” the bank’s analysts said.
The iShares Semiconductor ETF (SOXX) finds a confluence of support at $448 from the top trendline of an ascending triangle and the 50-day simple moving average (SMA).
Micron (MU) shares encounter support at $67.50 from the lower trendline of a descending channel.
Despite brokerage research pointing to a challenging outlook for chip stocks, the industry’s bellwether exchange traded fund (ETF), the iShares Semiconductor ETF (SOXX), is trading near crucial technical support. This may provide a much-needed circuit breaker to halt the sector’s recent slide and offer bargain hunters an attractive entry opportunity. Let’s take a closer look at the metrics of the fund as well as sector heavyweight Micron Technology, Inc. (MU).
With assets under management (AUM) of $7.3 billion, the iShares Semiconductor ETF seeks to provide similar investment results to the ICE Semiconductor Index–a benchmark comprising the largest 30 U.S. stocks in the semiconductor sector. Some of the better-known names in the ETF’s portfolio include NVIDIA Corporation (NVDA), Broadcom Inc. (AVGO), and Intel Corporation (INTC). Trading wise, more than 700,000 shares exchange hands per day on an average 0.02% spread to keep transaction costs low. Meanwhile, the fund’s 0.67% dividend yield more than offsets an annual management fee of 0.43%. As of Aug. 13, 2021, SOXX has a year-to-date return of around 20%, while over the past three months, the ETF has gained 15.23%.
The fund’s price reached a new all-time high in late July but has subsequently retraced as traders took some profits off the table. However, the pullback provides a high-probability entry point around $448, where price finds a confluence of support from the top trendline of an ascending triangle pattern and the rising 50-day simple moving average (SMA). Those who take a long position should consider using the measured move technique to book profits. To do this, calculate the dollar move of the widest section of the triangle, and add that amount to the initial breakout point. For example, add $70 to $448 for a profit target of $518.
Micron designs, manufactures, and markets memory chips and storage products tailored to PCs, data centers, smartphones, game consoles, automotive, and other computing-related devices. As part of Morgan Stanley’s published report on the semiconductor industry Thursday, analyst Joseph Moore downgraded the stock to “Equal Weight” from “Overweight,” arguing that the chipmaker has significant exposure to the DRAM segment, which could see the stock susceptible to the brunt of pricing declines. The analyst also trimmed his 12-month price target on the shares by $30 to $75– still representing a 6.8% premium to yesterday’s close of $70.25. Since the start of the year, the stock has climbed 6.56% as of Aug. 13, 2021.
Micron shares have oscillated within an orderly descending channel since early April. Earlier this week, the price failed to break above the pattern’s top trendline, which caused a cascade of selling over the following days. Although the bears currently control the action, active traders should look for buying opportunities near the pattern’s lower boundary at $67.50. In terms of trade management, place a stop-loss order just under the channel’s lower trendline while targeting a move back to the pattern’s opposing side at around $80.
A descending channel is drawn by connecting the lower highs and lower lows of a security’s price with parallel trendlines to show a downward trend.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.