Vaneck Vector Trust ETF Semiconductor (SMH) analysis: will weak supplies change the price?

Strong demand for chips has led to a challenge

Vaneck Vector Trust ETF Semiconductor analysis                                 

The Vaneck Vector ETF (SMH) eased in the third week of February after hitting an all-time high in the prior week. Strong demand and weak supplies have led to a tightening of the semiconductor market. In its latest earnings release, General Motors reported that shortage of these components has led to a slowdown in manufacturing to the extent. 

Seasonally, the SMH experiences mixed returns in March. The technicals look positive as the SMH takes a breather and regathers before likely heading higher during the last month of Q1.

Tight semiconductor market

The shortage of chips has led to a challenge for several industries that use this vital component. Automobiles, phones, and most electronic devices are feeling the pinch. This issue has not gone unnoticed by the Biden administration which would like to revive the manufacturing sector in the wake of the pandemic. To help ease the pain, the administration is expected to sign an executive order which will begin a review of domestic manufacturing and supply chains for critical materials including semiconductors. The United States has also tried to leverage its ties with Taiwan, one of the world’s largest chip manufacturers, to make sure American customers are not disadvantaged.

Seasonality

Historically, the performance of the SMH has been mixed in March. Over the past 10-years, the SMH has increased 60 per cent of the time for an average gain of 0.6 per cent. The numbers are very similar over the past five years and over the past 20 years, which consistently shows mixed results.

Vaneck Vector Trust ETF Semiconductor technical analysis

In June of 2020, the SMH broke out and the 10-week moving average crossed above the 50-week moving average which shows that a medium-term uptrend is in place. Since that period the SMH has not closed below this level and has continued to trend higher. Support is seen near the 10-week moving average at 232. Target resistance is seen near $265. 

Short-term momentum is positive as the fast stochastic, which is a momentum oscillator, generated a crossover buy signal. Prices are overbought. The current reading of the fast stochastic is 89, above the overbought trigger level of 80, which could foreshadow a correction. The relative strength index (RSI) is beginning to stall. It was unable to make a new high in February when prices hit fresh all-time highs which are known as a divergence. The RSI also reflects an overbought condition. The current reading just above 70, breaches the overbought trigger level and could foreshadow a correction. Medium-term momentum is positive as the moving average convergence divergence (MACD) histogram prints in positive territory with an upward sloping trajectory which points to higher prices. 

Vaneck Vector Trust ETF Semiconductor: how to trade?

The semiconductor market is tight. Getting chips for phones, automobiles, and most electronic devices is not easy. The tightness has come to the attention of the Biden administration which is issuing an executive order. The seasonals are mixed, but the technicals remain strong. Prices are overbought and are likely to consolidate in February before beginning to rally again in March.

FURTHER READING: ETFs, explained

FURTHER READING: ETF vs index fund: which is better?

 

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