In recent weeks, we’ve spent a lot of time on the economic impact of the microchip shortage.
We’ve looked at the impact on the auto and tech industries.
We’ve also explained how – along with other factors – it’s pushing up prices.
Then on Monday, we looked at the microchip shortage from another angle – national security.
Well, today we switch focus again.
After looking at the fundamental story, we look at the technical story.
And we pose the question: if prices are rising because of the chip shortage, is there a way to offset that impact by making a simple investment?
Turns out there is. We explain it all below…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
- To introduce you to the most important investing themes of the day, and
- To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Dave Forest and Nick Giambruno. And from the founder of our business, Doug Casey.
As it happens, this subject and this way of thinking about it is part of the foundation of Casey Research. Every day, our experts spend their time looking for ways to help their readers find opportunities in the face of adversity.
Today’s subject is a perfect example of that. Before we get into the technical picture, a recap…
Rebound Stalled – What Happens Next?
The semiconductor shortage story has dragged on for months.
Initially, the shortage was due to factory shutdowns because of the COVID-19 pandemic. Today, however, there are many other challenges facing the sector.
It involves both a severe supply-side shock and a fierce rebound in consumer demand for everything from cars to Sony’s newest PlayStation.
Then, just as factories started to ramp up operations… Texas, the epicenter of semiconductor fabrication in the U.S., was completely shut down in February by a winter storm.
In the meantime, demand continued to rise for everything. And in today’s world, more and more products use technology, and more and more products contain microchips.
The bottom line is that when supply can’t meet demand, prices go up.
But what about the investment side of it? Especially from the technical analysis of stocks perspective? As always, we turn to our colleague Imre Gams for more insight on this.
We asked Imre about the recent price performance of microchip stocks. Here’s what he told us:
Recently, semiconductor stocks haven’t exactly responded to this basic principle of economics – although they did rebound strongly in 2020, along with most other stocks.
But since February, when Texas got hit by that winter storm, semiconductor ETFs have broadly just traded sideways.
So why haven’t they gone straight up? The answer lies in the price charts.
Sideways price action causes investors to lose interest. After all, sideways is boring.
And then, by the time the breakout finally occurs, it’s too late. Those same investors are left sitting on the sidelines wondering what happened.
The other major takeaway is that often, sideways price action ends up resolving as a triangle… one of my favorite chart patterns. Triangles are great trade setups, and they are very simple to identify on a price chart.
If you recall, Imre has explained the triangle chart patterns before. In fact, we looked at it yesterday, when we profiled the silver price chart. In that instance, the price action failed to break out through the upper level of the triangle and instead has now formed a sideways pattern.
But back to microchip stocks.
Price Breakout Hints at Perfect Buying Opportunity
Here’s a chart of the VanEck Vectors Semiconductor ETF (SMH). It’s one of the largest semiconductor ETFs on the market.
As Imre told us, “Triangles don’t get much clearer than this!”
You can see the clear formation. It traded within the range of the triangle – formed by a compression in the range as the highs and lows draw closer together, before the price breaks out.
Imre explains further:
The trading range since February 2021 is cleanly contained by two trend lines. Notice how the bottom trend line is sloping upwards, indicating an upward pressure on prices.
The top trend line, in this case known as a barrier line, has prevented SMH from making new highs. That is, until June 28, when the ETF finally managed to break above both the barrier line and the previous all-time high established on February 16.
The triangle can now be considered complete, and my expectation is that we will see continued upside in SMH into the fall, perhaps even into the end of the year.
This is all good news for Dave Forest, who recently added a microchip company to his Strategic Investor buy list.
In fact, we could say that Dave picked the entry point perfectly, just as the price rebounded off the top trend line. That line – for the ETF, anyway – is now likely to act as a support for the price.
Already, the trade is paying off… even though it’s still early days. But it was great timing. Dave’s position is up 6% since he recommended it early last month. And if Imre is right about the technical analysis side of the story, now is still a great time to add microchip stocks to your portfolio.
Personally, we like Dave’s individual picks, or if you prefer to diversify across the sector, the VanEck Vectors Semiconductor ETF (SMH) is a fine alternative… although we always prefer buying individual stocks.
Editor, Casey Daily Dispatch