Semis are on fire.
However, that spike has taken the chips to their most overbought levels since January 2018. The SMH ETF’s relative strength index, a momentum measure, has stretched past 70, the level that typically indicates overbought conditions. The last time its RSI was that high at the beginning of last year it marked a peak that preceded a 14% drop in less than three weeks.
JC O’Hara, chief market technician at MKM Partners, isn’t worried.
“I never want to use the word ‘overbought’ because it carries such a bad connotation. What is really overbought? Overbought is just a momentum surge,” O’Hara said on CNBC’s “Trading Nation” on Wednesday. “If you look back at February, as the semis were moving higher, the SMH hit 70. If you sold then, you would have missed an additional 12% on the upside.”
Since the ETF’s RSI peaked above 70 in late February, it has rallied to its highest level ever. The ETF notched fresh records on Tuesday and Wednesday.
“Taking a step back, overbought is actually a good thing, so we would look to be buyers of any sort of minor weakness here because we actually think the strong trends continue higher from here,” said O’Hara.
Not all semis stocks have performed well over the past year, though. While Advanced Micro Devices has rocketed 165% higher in 12 months, Nvidia has plummeted 21%. Those disparate performances are a red flag to Gina Sanchez, CEO of Chantico Global.
“The semis are a challenge right now to trade as a group,” Sanchez said on the CNBC segment. “The sector as a whole is still trading below its long-term valuation, so you could argue that that’s a buy. But I’m going to tell you there’s a lot of different stories trading in that whole group of stocks.”
The SMH ETF trades at 17 times forward earnings, but its constituents vary wildly. Micron Technology, for instance, trades at 8 times earnings, while Universal Display trades with an 67 times multiple.