Semiconductor stocks did something not seen since the dotcom bubble burst. What the charts show
As if the recovery in the Nasdaq from the March 30 low wasn’t shocking enough, take a look at how the VanEck Semiconductor ETF (SMH) did relative to the benchmark index. The SMH/ QQQ weekly ratio chart broke out to a 26-year high. It’s an all-time high going back to May 2000, just two months following the March 2000 tech bubble high. Let this sink in for a moment. The last time the semiconductors outperformed the Nasdaq-100 to the degree we’re seeing right now was in the dotcom bubble. But before you suggest I’m calling for another bubble bursting, far from it. The SMH relative to the broader tech trade is powering ahead with a break to new highs, which is not something you tend to see at the end of trend. I’ll show on a key semi player below that the fundamental valuations are far from stretched in a “bubble-icious” manner. Semis represent about 30% of the Nasdaq-100 ETF QQQ and have done a lot of heavy lifting not only since that March low, but since the rally began in 2015. Now here’s where it gets interesting. Pulling up a weekly chart of SMH going back to 2018 you’ll see some relationships that are almost too clean to be real — but they are. The first major bullish wave from the 2020 lows amounted to a 232% rally at 42-degree angle based on the scaling I’m using. The second major bullish wave launched from the post-2022 lows and the real AI buildout amounted to a 239% rally at a 41 degree angle. 232% and 239% at a 42- and 41-degree angle. See where I’m going with this? Fast forward to today, and we find ourselves in a third cyclical bull trend from the early 2025 lows that has traveled “only” 207%. Targeting another 235% rally projects SMH at ~$571, a major decision zone. If that zone is pierced the prior relationships suggest the cynical nature of the two prior trends no longer applies and we’re in a bigger picture, secular bull trend. Further evidence that we’re possibly in a secular trend is we’ve traveled at a 52-degree angle. It’s accelerating higher. These are not the typical market behaviors of a trend that is mature and ripe for reversal. I know your head is probably spinning with these geek technical relationships, but we’re visual investors who use a logical, subjective, weight of the evidence approach to gauge our location in market cycles. Fundamentals are wonderful to tell you which securities you should consider investing in, but they do nothing for timing or risk management. That’s where the technicals come in. Let’s look at a combination of technical and fundamentals. There’s a lot going on here, but that’s why every Tuesday you click over to this column to get an in-depth technical and fundamental look at the markets. Some identify as technical investors, others identify as fundamental investors. We feel there’s a third school of analysis, which is a technical analysis approach to fundamental analysis. To start, look at the top panel, which is price action only. Basically, NVDA has been sideways since this time last year threatening a breakthrough the round $200 figure. Just below that I’ve included the yearly revenue figures along with the year-over-year percentage growth rate. In 2021-2023 this company was bringing in twenty-something billion in top line revenue. Three years, later analysts are expecting NVDA to bring in two hundred-something billion in revenue. The year-on-year growth rates are shown in blue. For a $4 trillion-plus market cap that kind of growth rate is downright shocking. The part that really gets me is the current forward valuation, with NVDA trading at 23.7 times earnings. Calendar year 2026 is expected to bring in $8.34 in EPS. Looking at the technical history of a 23 forward PE, we see the line is at support. It’s CHEAP. And what’s even more interesting is this cheap forward valuation of NVDA at 23 X’s NTM earnings occurs usually after-market sell-offs like 2019, 2022 and 2025 (look at the color-coded ovals). The exception is 2024, which was just a sideways consolidation in price the year that top line revenues went from $26 billion to $60 billion in 12 months. This current consolidation with a 23 X’s forward PE has a similar look. With Blackwell shipping and sold out, Vera Rubin on the horizon set to strike back at Google’s TPU recent gains, and the SMH leading the broader market ahead set to break the cyclical history of SMH, we’re set to increase the semiconductor allocation in our portfolio at Inside Edge Capital. Remember, fundamentals tell you what to invest in. Technicals tell you when the time is to invest. —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 like the idea presented above at www.InsideEdgeCapital.com . DISCLOSURES: Todd owns NVDA personally and for clients in his wealth management company Inside Edge Capital, LLC. Charts shown are Koyfin and TradingView. 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.
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