Semiconductor stocks have been on a remarkable run, but recent indicators suggest they may be venturing into overbought territory. As the S&P 500 continues to set new all-time highs, the VanEck Semiconductor ETF (SMH) has been making headlines for its surging relative strength indexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... (RSI). This surge, which briefly crossed the 80 threshold before retracing to around 71, has raised concerns among investors and analysts.
The Overbought Conundrum
An overbought condition, as reflected by a high RSI, is not inherently problematic. In fact, it often indicates strong upward momentum in an asset’s price. However, there are times when this surge in buying interest becomes excessive, leading to concerns about a potential correction. The semiconductor sector, with its recent parabolic rise, exemplifies such a scenario.
The SMH has been on a tear, surging more than 8% since the beginning of the year, following an astonishing 72% gain in 2023. This strong performance is exemplified by its largest holding, Nvidia, a prominent chipmaker and artificial intelligence innovator. Nvidia’s stock has surged over 24% in 2024, building upon an astounding 239% gain in 2023.
Nvidia’s Soaring Trajectory
Nvidia’s remarkable rise has not only made it a top performer in the semiconductor sector but has also played a pivotal role in driving broader market gains. The company’s expansion into artificial intelligence has been a key driver of its success. In 2023, Nvidia joined the elite club of U.S.-listed companies with a market capitalization exceeding $1 trillion.
At present, Nvidia stands out as the most overbought stock on the list, boasting a 14-day RSI reading of 83.91. This remarkable figure indicates the stock’s recent surge in momentum. Analysts have been overwhelmingly bullish on Nvidia, with 84% of experts polled by FactSet maintaining a buy rating.
Broadcom: Another Overbought Contender
Broadcom is another chipmaker that has made it onto the overbought list, with a 14-day RSI reading of 71.71.
In early December, Broadcom’s shares reached their highest level in a year following Citi’s decision to resume coverage of the stock and raise its price target. The move was attributed to the company’s strong core business performance and the accretion resulting from the VMware acquisition.
Other Overbought Chip Stocks
Joining the ranks of overbought semiconductor stocks are Taiwan Semiconductor and AMD, both of which have experienced notable surges in momentum.
As these semiconductor giants continue to garner investor attention and momentum, it’s essential to keep a close eye on their performance and assess whether the overbought conditions persist or lead to a potential correction. While overbought conditions can sometimes signal a buying opportunity, they can also be indicative of an overheated market that may be due for a pullback. Investors and analysts will be closely monitoring these developments in the coming weeks to gauge the future trajectory of semiconductor stocks.
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