A Breather in The Semi Selloff before a Cold Summer for the Sector

Authored by: Tyler Tucci

Semiconductors had led the most recent push higher in US equities from 2019 to 2021 and are a key indicator in the health of both the global economy and the US equity market. If we were to expect higher equity prices overall we would expect to see the semi sector stabilize and rally over the summer months, a traditionally bullish period. Unfortunately, this is not what our forecasts see.

Instead, we expect the recent cascading selloff to become merely a slow bleed into monthly options expiry at month-end. Following this period of relative stability, we expect the selloff to continue and target 20% drawdowns over the next 60-90 days in ASML, AMD, TXN, NVDA, and AMAT.

It is somewhat alarming for a sector that provides equity markets support and leadership to deteriorate across our metrics as it has done over the past three months. In nearly all cases, health scores for our 6 most highly weighted factors (Competition, ESG, Earnings Power, Management, Reputation, and Systemic/Macro) peaked in March and have rolled over significantly and in many cases into contractionary territory.?

Although we believe an equal-weighted basket of shorts across these 5 semi companies would perform well over the next 60-90 days our models suggest could be 2 opportunities that are well outside of current market pricing.

First, our predicted earnings report for NVDA differs wildly from the current market consensus as found on tradingview.com. Our earnings report shows a median Earnings per Share of $1.01 vs $1.30e with revenues of $6.7bln vs 8.1bln estimated. NVDA has beaten EPS 8 quarters in a row so if our projections prove to be more realistic than the market currently, the journey to 137, our projection for mid-august, may begin sooner. Further, our earnings power score has been trending straight down and while it hasn’t reached negative territory officially it could soon.

The second opportunity the model sees is in downside optionality in global semi leader, ASML. The model views ASML as the most attractive downside opportunity and sees a move close to 400 by July 14th, a 23% move. Interestingly, current pricing for the at-the-money ASML put option expiring July 15th implies a roughly 9% move which is tame considering our modeled downside. Given our forward price projections, the model suggests stability until early June so it may be advantageous to wait until then to enter downside expressions.

While we wish we could provide better news for equity bulls, who have had a challenging past several quarters, to say the least, it does not appear that we are ready to call time on the semiconductor sell-off quite yet. Check back with us in about 60 days, our current estimate for a tradeable low, and before the next round of semi-earnings reports kickoff. Hopefully, we'll have better news for those with a long bias.?

Disclaimer:?No financial advice is given or implied. SynerAI is not a registered investment advisor or stockbroker. Information is provided for educational purposes only.