Fairlead Strategies founder and managing partner Katie Stockton indicated that the soaring rally in semiconductor stocks may be approaching a pause. In an interview on Tuesday, Stockton emphasized that the advance of the VanEck Semiconductor ETF (SMH.US) is showing a pronounced parabolic pattern on both an absolute and relative basis. While strong upward momentum persists, technical indicators are flashing warning signals of an overextended market. Stockton explained, "When we look at the ratio of the VanEck Semiconductor ETF to the S&P 500, and compare it to the ratio of the software industry ETF (IGV.US) to the S&P 500, the two are currently sending opposing signals." According to DeMark indicators, the semiconductor sector ratio is exhibiting overbought conditions, while the software sector shows oversold characteristics. This divergence suggests that the popular institutional strategy of "going long the semiconductor ETF while shorting the software ETF" could begin to unwind in the near term. Stockton specifically noted that memory stocks like Micron (MU.US), Western Digital (WDC.US), and Seagate (STX.US) have not triggered the same counter-trend sell signals as the broader semiconductor sector. However, she also cautioned that investors should be watchful of Micron's recent pattern of consecutive gap-up openings—traders should closely monitor whether the stock can hold these gaps in the coming days. For investors seeking opportunities, Stockton recommended focusing on more attractive areas such as the software industry ETF (IGV.US), the healthcare sector ETF (XLV.US), and Bitcoin. She particularly pointed out that following the market strength in April, medium-term momentum indicators for these areas have shown signs of improvement. From a broader sector perspective, the semiconductor sector recently set a historic record with 17 consecutive days of gains. Such an extreme one-sided move inherently carries the risk of a mean reversion. Although research firms like Deloitte project global semiconductor sales will approach the $1 trillion mark by 2026, and the long-term fundamentals for AI chips remain solid, the divergence between short-term valuations and price action is making tactical reduction of positions a mainstream strategy for now.
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