Nvidia’s Impact on the Semiconductor Sector
As we transition out of August and summer, all eyes are on Nvidia, which is set to report its earnings tonight. This is, in many ways, a significant event. The reaction to Nvidia’s report will have widespread implications, particularly for the Vaneck Semiconductor ETF (SMH), which is the most sensitive to these developments. The importance of this ETF cannot be overlooked, especially when we examine its trends on a chart.
Since early July, SMH has shown minimal movement, with several false breakouts and breakdowns surfacing over the weeks. It seems to be trapped in a six-week trading range. Importantly, SMH has used two prior phases of consolidation, or trading boxes, to establish a continuation pattern within a larger upward trend. Previously, this upward movement began with a classic cup-and-handle formation that emerged between April and early May. If this pattern rings a bell, it’s similar to what happened with the S&P 500, NDX, and numerous other ETFs and stocks, which also surged from comparable setups before embarking on their uptrends. Simply put, for SMH’s upward trajectory to carry on, we’ll need to witness another breakout from this trading range.
Looking at weekly charts, SMH has appreciated around 75% from its lows in April to its recent highs. Back in 2020, a similar situation saw SMH reaching a 75% gain by early August. It’s worth noting that we can’t tweak these two timelines any further. In 2020, SMH experienced a spike at the end of August before being hit by a market correction in September. Though that period was turbulent, it only temporarily impeded SMH on its path to a 230% increase. This pattern serves as a potential roadmap for SMH, which remains near summer highs leading up to tonight’s earnings report.
If we examine more closely, we can see that SMH has achieved new all-time highs recently, marking its sixth multi-year pattern breakout, as most evident on the monthly log chart. In previous instances, the ETF remained elevated for several months following these breakout periods. If SMH were to falter right after this recent breakout, it would represent a clear shift in behavior compared to what we’ve observed since 2013.
Moreover, the relative performance of SMH against the XLK technology sector suggests an impending breakout from a bullish reverse head and shoulders pattern that’s been forming for nearly two years. This last occurrence was in early 2024, leading to a notable six-month outperformance by SMH. This connection is significant for a few reasons. Semiconductors constitute the largest segment of the technology sector, representing 36% of it (with software close behind at 35%). Essentially, semiconductors carry the most weight at 13% on the S&P 500. Nvidia, being the dominant stock among SPX, SMH, and XLK, plays a critical role; its continued growth is vital for helping these indices break through their respective ceilings.
To summarize, Nvidia’s performance is crucial, not just for its stock, but for the broader markets, including SMH and XLK. If SMH outperforms XLK, it has the potential to propel SPX and the entire market upward, underscoring the importance of both the stock and the ETF for sustaining this upward momentum.
