Semiconductor Stocks Are at an Inflection Point

The stock market rebound since March has been one of the most impressive rallies you'll see. And the gains in semiconductors have been especially strong...

These stocks have surged more than every other sector since the market bottomed. And they've moved higher almost every trading day of April – an incredible feat.

Not only that, but this group jumped a massive 47% in just 18 trading days.

No, that isn't a typo. This is the largest semiconductor rally we've ever seen... And it puts the sector at a crucial inflection point.

According to history, this setup will end in one of two ways: Either semiconductor stocks continue soaring to new heights... or they'll crash back to earth.

So we need to pay close attention right now. Let me explain...

What Happens After a Massive Semiconductor Rally

Overall, the stock market has been on a tear. After the S&P 500 Index's relative strength index ("RSI") reversed on March 30, the index jumped 13% by April 24.

But that's nothing compared with the move in semiconductor stocks...

Again, the entire sector rallied an unfathomable 47% over those same 18 trading days. Take a look...

Looking at that chart, you might feel incredibly bullish... or fearful. History justifies both reactions.

Again, this is the sector's largest 18-day rally ever. So to find similar setups, I looked for 18-day rallies of 30% or more. That has happened 10 other times since 1994.

On a broad look, the results after these instances look good...

Semiconductors are the building blocks of modern technology. And this group of stocks has soared an incredible 15% a year as a result.

You can do even better by buying after a massive rally. These setups have led to 19% gains over the next year... a solid level of outperformance.

But that doesn't tell the full story.

You see, these cases have led to outperformance... overall. But if you dig deeper, you'll find that these trades can be either incredibly profitable or massive losers.

That's because one year after these setups, semiconductor stocks rose only 50% of the time. The table below shows just how wide the gap is between those winning and losing trades. Take a look...

Rare market setups don't usually work like this. We tend to see consistent moves, with only one or two outliers. But this time, it's split right down the middle.

In cases where semiconductors rise, they soar an average of 76% over the next year. But when they fall, the sector crashes 38% on average.

That's why semiconductor stocks are at an inflection point today.

As investors, we should prepare for both possibilities... which means we'll use the trend as our guide for what's to come.

Right now, the trend is up for semiconductors. Until that changes, we expect the gains will continue.

Good investing,

Brett Eversole