The S&P 500 has seen 54 record closing highs in 2024 to date.
That’s the fifth most during any calendar year in history.
But when the S&P started moving to new high ground following the election, something important went missing.
That’s semiconductor stocks.
Chipmakers are failing to confirm the S&P’s new highs.
That’s important because chip stocks have led the way ever since this bull market began back in October 2022.
So today, let’s look at why chip stocks are important to watch – and see what they say about the bull market trend…
From Leader to Laggard
The artificial intelligence (AI) buildout requires advanced computing hardware.
Semiconductors power that hardware, which is why chip stocks have been among the leaders of this bull market rally.
Since the lows on October 14, 2022, the VanEck Semiconductor ETF (SMH) rallied by 192% into the July peak this year… more than double the return of the S&P 500.
SMH also broke to new high ground months before the major indexes. SMH started making new highs in price back in November 2023.
It wasn’t until January this year that the S&P 500 did the same.
All along the way, SMH has been confirming the bull market by making higher highs and higher lows… at least until recently.
Take a look at the chart below:
SMH made a peak in July this year at the circle. So did other major indexes like the S&P 500 and Nasdaq Composite before pulling back into early August.
But while the indexes have recovered to fresh highs, SMH is still 10% below its July peak (arrow).
This key sector behind the bull market is starting to lag.
And one stock could seal the fate of the semiconductor rally… and determine if chip stocks can catch up…
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Nvidia Is Flashing Bearish Signals
No stock has had a bigger impact on the chip sector than Nvidia (NVDA).
The company’s semiconductors are in high demand for AI applications, crypto mining, and everything in between. That has sent NVDA shares soaring over the past couple of years.
Those gains mean that NVDA alone makes up 22% of the SMH fund.
So NVDA’s next move will have a huge impact on whether SMH can catch up to the S&P 500.
But NVDA’s chart is firing off a couple of different bearish patterns. Let’s look at the chart below…
First, notice that the Relative Strength Index (RSI) shows sagging momentum in the stock price.
The RSI measures underlying price momentum. It started making a lower high (shown with the dashed trendline) as NVDA rallied from “A” to “B.”
And now there’s another pattern to watch over the near term. Take another look at the chart:
A bearish “head and shoulders” pattern is forming.
A head and shoulders pattern warns of a new downtrend if it completes.
The outside arches in the chart show the two shoulders, and the head is in the middle. The dashed line is called the neckline.
If the price breaks below the neckline, a transition to a downtrend is underway.
That makes the $132 price level at the neckline important to watch as we head into year-end.
The S&P 500 might be rallying for now.
But if chip stocks don’t join the party, the bull market may be in its final stage.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict