Will Semiconductors Be A Problem in 2026?
The Dow Jones US Semiconductors Index ($DJUSSC), led by the likes of NVIDIA Corp (NVDA), Broadcom, Inc. (AVGO), and Advanced Micro Devices (AMD), has carried the major indices higher throughout much of the current secular bull market. The group's 40%+ gain in 2025 propelled the S&P 500 and NASDAQ 100 to all-time highs, despite the lengthy February through April period of selling. Since that April 7th low, however, semiconductors have more than doubled. That type of nine-month gain is unsustainable.
But it's not the short-term rally that concerns me the most. It's the longer-term monthly chart that really makes me want to step back and reassess prospects for 2026.
The monthly Percentage Price Oscillator (PPO) reached momentum heights in 2024 that we had never seen before. The 2025 rally has left us with a long-term negative divergence that likely will need to be resolved at some point. I look for a 50-period SMA test and/or a PPO centerline test (pink arrows) to "reset" momentum moving forward after I see negative divergences emerge. I don't know if we'll see that type of selling, but it's a possibility. If we do, it'd likely be part of another cyclical bear market for the S&P 500. We could, however, see a rising 20-month EMA test that would likely drag stocks into a more palatable correction. Either way, it's a battle that'll be worth monitoring, because this group is so influential.
The monthly Relative Strength Index (RSI) is at nearly 74, and it's been above 70 for more than six months now. During this secular bull market, the monthly RSI has fallen from overbought (above 70) conditions like this on four previous occasions. Each time, it's resulted in weakness in semiconductors and the S&P 500. That's highlighted above with the red-dotted vertical lines followed by red shading. This isn't my opinion, it's a fact.
Semiconductors make up the largest industry group in the S&P 500, and right now, it's a very crowded trade on the long side. Heaven forbid anyone starts talking about a possible recession, because stocks in this industry are, in many cases, priced for absolute perfection and heavily reliant on rapidly-growing earnings — something we wouldn't see in a recession.
I'm going to discuss the signals that could lead us into a correction in a FREE live streaming event next Saturday, December 20th, at 10 am ET. We will open registration for this event in our FREE EB Digest article on Monday, December 15th. I also plan to include a stock on Monday that appears to be bottoming after a lengthy, two-year decline of more than 65%. It's a lot cheaper now, and a lot of risk has been squeezed out of the stock. To receive this stock, subscribe to our FREE newsletter, and register for Saturday's event, CLICK HERE!
Happy trading!
Tom
