Chip stocks are ready for a big rally, based on this 'truly unusual' data point

MW Chip stocks are ready for a big rally, based on this 'truly unusual' data point

By Tomi Kilgore

Stocks of Nvidia and Taiwan Semiconductor at near record highs shows that momentum is in the generative-AI theme, DataTrek says

It's a good bet that the semiconductor sector is gearing up for a big rally, based on the "truly unusual" way that it has acted relative to its software rivals over the past several months.

That's according to the analysis of DataTrek Research co-founder Jessica Rabe, who sees chip stocks having a run of solid outperformance through the first quarter of 2025.

Over the past 100 trading days through Monday, the VanEck Semiconductor exchange-traded fund SMH slipped 1.26%, while the iShares Expanded Tech-Software ETF IGV surged 15.37%.

The "statistically anomalous" 16.6-percentage-point underperformance by the chip ETF over that time actually bodes well for chips over the next 100 days.

The fact that software outperformed at all is unusual. SMH, the chip ETF, has beaten IGV, the software ETF, by an average of 2.3 percentage points over any given 100-trading-day period since 2010, Rabe said, well before the debut of ChatGPT and the start of the artificial-intelligence boom.

But SMH's recent underperformance has been by "a truly unusual amount, having only occurred 0.9% of the time since 2010," or for just 34 trading days out of about 3,730, she said.

"When software's 100-day returns beat semis by an especially uncommon amount, this outperformance usually mean reverts thereafter," Rabe wrote in a note to clients.

Here's what has happened next:

-- Since 2010, when chips have lagged software by more than 15 percentage points, or by nearly two standard deviations of the norm, chips have outperformed 81% of the time over the next 100 days.

-- Since 2010, when software has beaten chips by more than 15 percentage points, chips have gone on to outperform by 7.6 percentage points over the next 100 days.

But for now, it's not just about outperformance.

Rabe noted that shares of Nvidia Corp. $(NVDA)$ and Taiwan Semiconductor Manufacturing Co. $(TSM)$ (TW:2330) make up more than one-third of SMH.

That fact that those stocks are trading near their record highs "shows momentum in the [generative] AI theme," Rabe wrote, and therefore support the case for SMH.

Basically, investors in SMH at current levels "need to believe in the next leg of [the generative-AI] story," Rabe said.

In afternoon trading on Tuesday, SMH rose 2.2% while IGV tacked on 1.8%.

-Tomi Kilgore

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October 29, 2024 14:53 ET (18:53 GMT)

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