Are Semi-Conductors due for a pullback?

Hello readers,

Perhaps it was time for a break. With markets closed on Wednesday for Juneteenth, investors had extra time to contemplate Nvidia's valuation and the broader AI theme. But it is not as simple as it looks at the surface. The Semi-Conductor group as a whole (DJUSSC) took a nose dive and sold off on huge volumes on Thursday and Friday. Take a look at the following chart:

The Semi-Conductor group was on a roll (enjoying the AI wave) and in early November it was at 8659 thereby rising by 143% to 21,000 earlier this week. Certainly it was due for a pullback especially in the triple witching (mainly options expirations) week. But this effect seems to continue and the group could take a dive towards the 20-days and/or 50-days EMA lines which are 18750 and 17234 at the moment. Not only this, Semi-Conductors as a group have underperformed the broader market during the months from July-October, so in the intermediate time frame we are looking at a weakness in this group and overall in the Tech sector for next few months. On a positive side, this would yield to better entry points and buying opportunities in the near future (by the dip). Till then, we need to cash our money and run to protect the capital.

Does this mean market is going to crash? who knows, but there are better opportunities as capital will rotate into other areas like XLY (Discretionary), XLV (Healthcare, Bio-Tech), XLE(Energy) and XLF (Financials) which traditionally perform better than Tech sector during the months of July-September.

Overall, the Stock market rally has gone very well so far this year. The S&P 500 rose by 0.6% last week while hitting its 31st record high in 2024. Dow Jones advanced 1.5% (although on YTD basis it has lagged both Nasdaq and S&P 500). Nasdaq Composite was almost flat past week but Nasdaq 100 dropped by 0.27%. Small Stocks which underperformed Nasdaq and S&P 500 this year also rose by 0.79%. In other words, areas which were lagging performed well last week and aggressive areas which were performing well this year underperformed last week.

Important Events next week:

Tuesday: Consumer Confidence

Wednesday: New Home Sales

Thursday: Durable Goods Orders, GDP (QoQ), Initial Jobless Claims

Friday: Core Price Index (MoM and YoY), Chicago PMI

Important Earnings this week:

FedEx: 6/25

Micron Technology: 6/26

Nike, NextEra Energy: 6/27, 6/30

Actionable Stocks:

Long-Term View: These stocks were mentioned for long-term holdings in our last commentaries:

MSFT:

Microsoft rose by 1.63% last week and continued to consolidate at these levels. With the near term possible pullback in Nasdaq, Microsoft could also come down temporarily but could be a very good buy at 50 days or 20 days Moving averages.

NVDA:

By the time they came back Thursday morning, investors seemingly had a change of heart. Nvidia shares fell 6.6% over the last two days, dropping the company to the No. 3 spot in the market cap ranking, behind Microsoft and Apple. As mentioned in our recent commentaries, we knew that Nvidia was extended and we better wait for it to come down. Till then, if you have profitable positions in Nvidia then this is a critical time to rethink your strategy and taking at least some money off the table.

AAPL:

Apple is also likely to test its last breakout level at 200 before continue to consolidate in its top range. Apple remains on our long-term buy list.

AVGO:

Same comments as for Nvidia, if you have profitable positions in Broadcom, then this is the time to book some profits and take money off the table to protect against a possible drawdown along with the broader semi-conductor group.

Medium and Short Term Picks:

For these stocks we suggest that profits should be taken at 15-20% levels from the buying price or at least 25-50% of the position should be taken off the table to ensure profitable trades. For the rest of the holding, a further assessment will be required at that time to assess future potential.

NVO:

NVO consolidated last week at the upper side of its current trading range. It could be a pause before the stock turns again to continue its upward run. The stock is actionable at its current price levels.

New Interesting Stocks for Watchlist:

PDD:

Mentioned last week, PDD lost 3.44% last week but found support at its 50 days EMA. Once again, we think that it is currently actionable at this price with a suggested stop loss of 8%.

GOOGL:

As mentioned last week, the alphabet continues to form a tight consolidation and is likely to break out riding the AI growth wave. It performed very well last week and is expected to perform well in the intermediate term. The stock is actionable at its current price levels as our TR Weekly indicator has also issued a buy signal.

AMZN:

Amazon has also performed very well and is likely to breakout from current levels as mentioned two weeks ago. The stock is actionable at current levels and has an edge over the extended Semi-conductors in the current market environment.

NXT:

NextTracker provides intelligent, integrated solar tracker and software for solar projects globally. It is a newly traded company (IPO launched in July 2023) but company seems to be well poised and actionable at current prices.

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Happy Trading and best regards,

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