SOXX: Massive Pessimism Baked In (NASDAQ:SOXX)

Investment Thesis

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

Despite that, the SOXX has also been battered since the start of 2022, as many of its component stocks were pummeled. As a result, the SOXX is down close to 28% YTD (as of May 25) and remains deeply entrenched in bearish momentum. Our price action analysis also suggests that the SOXX could struggle in the near term, as a bear trap reversal remains elusive. Therefore, we urge investors to monitor its price action carefully for signs of a potential reversal.

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

Six Of Its Top Ten Holdings Are In A Bear Market

With six of SOXX’s top ten holdings hobbling in a bear market decline, it’s easy to understand why the ETF has also been significantly impacted. Notably, its top performers from 2020-21, NVIDIA (NVDA) and AMD (AMD), have been battered markedly as the market makers digested their massive gains over the last two years. Even SOXX’s top holding Broadcom (AVGO) couldn’t escape the bears’ clutches as investors rapidly digested its gains.

Bull Traps Were Laid Astutely In November And March

A closer inspection of SOXX’s price action unveils two chilling revelations. The run-up from the COVID bottom in March 2020 had a “final flush-up” over two months from September-November 2021. That culminated in a consolidation zone seen above, resulting in an astute bull trap. As a result of the trap, we could then infer that the consolidation zone was a distribution phase.

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

NVIDIA stock is starting to show signs of a potential bull-trap price action. We have been adding NVDA consistently on pullbacks, and also late last year until May this year. However, once the price started to move quickly after that, NVDA no longer looked that cheap. The recent price spikes have brought it into well-overvalued zones. Coupled with potential bull trap price action, it calls for increased caution. (Daily Market Analysis November 5, 2021, of Ultimate Growth Investing Service)

Readers can observe the significant flush-up price action that drew buyers rapidly into NVDA stock after its fall 2021 GTC conference. We believe greedy buyers who bought into the metaverse hype train in October/November fell directly into the market makers’ trap. Notably, the November bull trap was also significant in the SOXX. Therefore, SOXX investors must also pay close attention to the price action analysis of its underlying stocks. They could reveal critical clues that could portend noteworthy changes in the ETF’s momentum.

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

Currently, the SOXX is still ensnared in bearish momentum with no signs of a bear trap reversal price action signal. Notwithstanding, it seems to be testing its near-term support level at $390. However, it’s still too early to ascertain whether this support level could hold. Given its bearish momentum, we would be looking out for a double-bottom price action reversal signal that could forbode an eventual end to its affliction.

Otherwise, the market makers can force it down to the $286 level (an implied downside of 27% from the current price) before a potential bear trap reversal. Therefore, SOXX investors need to observe these two levels before considering to layer in accordingly.

Is SOXX ETF A Buy, Sell, Or Hold?

We rate SOXX as a Hold for now. We are still waiting for a bear trap reversal signal that could help us validate a potential bottom in its bearish momentum. However, we have yet to observe one yet.

Notably, the semiconductors trailing median P/E ratio has normalized significantly to 19.6x, well below its 10Y average of 24.6x. Therefore, we think its more reasonable valuation supports our price action analysis that the bottom could be within the two critical support levels presented above.