The AI trade just endured its most tumultuous October in years, even as the rest of the U.S. stock market was largely unaffected.
Since October 6, the largest AI and chip stocks by market capitalization have collectively shed roughly $5 trillion in value.
NVIDIA Corp (NASDAQ: NVDA) and Alphabet Inc (NASDAQ: GOOGL) each lost about $835 billion in market cap, while Intel Corp (NASDAQ: INTC) saw its market value nearly halve during October.
At the same time, another 625 large-cap U.S. stocks collectively added roughly $1.3 trillion in market value.
The S&P 500 slipped last week, yet 9 of its 11 sectors rose about 1% or more—a phenomenon that has not occurred at least since 1999.
Jeff Hirsch, editor of the Stock Trader's Almanac, calls this pattern "Octoberphobia." He is buying the beaten-down stocks.
"I did buy some today… it's an opportunity," Hirsch said last Friday. "The losses aren't as bad as the news reports suggest."
History Favors the Buyers
Historical performance supports Hirsch's view.
October selloffs like this one often point to what the Stock Trader's Almanac calls the "golden window" of the presidential election cycle—running from the fourth quarter of a midterm election year through June of the following year.
Since 1950, from the last trading day of October in a midterm election year to the end of June the following year, the S&P 500 has risen in all 19 instances, with a median gain of about 15%.
Chip stocks have risen in all 8 such periods since 1994, with a median gain of about 22%.
But the path is not always smooth.
In 2002 and 2018, chip stocks fell another roughly 11% before turning higher, and the sample size of 8 cycles is relatively small.
Chip Stocks May Have Just Triggered a "Bear Trap"
The iShares Semiconductor ETF (NASDAQ: SOXX) fell about 17% in October but is still up more than 50% year to date.
Last Friday, the ETF briefly dropped to $460, below its July 29 low of $464—which had marked this summer's bottom.
It then closed at $472, climbing back above that low.
This looks like a "bear trap": a swift reversal after breaking a key level, ensnaring traders who bet on further declines.
Hirsch likes the current timing.
"From historical patterns and seasonal factors, this period is very favorable for the semiconductor sector—it's the best time of the year," he said.
His firm bought into the sector last Friday.
Bulls first need to reclaim about $524, last week's rebound high, followed by early October's high near $596.
If the July low is lost, the $370 range from February to April comes into view, roughly 21% below last Friday's close.
The Cautious Are Still Waiting
Not everyone is buying aggressively.
Michael Hartnett of Bank of America said "risk-off sentiment will persist until the global rate-hiking cycle ends," noting that central banks worldwide raised rates 42 times over the past six months.
The Federal Reserve held rates steady last Wednesday, but two officials voted in favor of a hike.
Hartnett sees the key level for the VanEck Semiconductor ETF (NASDAQ: SMH) at $520; the ETF closed last Friday at about $522.
Converted on that basis, the iShares Semiconductor ETF corresponds to about $469—only slightly above the July low it barely defended.
As a result, the key levels for bulls and bears nearly overlap.
Hirsch said he would change his view if the S&P 500 breaks below its mid-September low near 7,550—less than 1% below last Friday's close.
Midterm election voting takes place on Tuesday first, after which the market enters November—historically the S&P 500's best-performing month of the year.
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