Semiconductor Sector Primed for a Major Breakout

Key Points

• After months of consolidation within a contracting range, SMH is nearing a significant breakout area, signaling the potential for renewed sector momentum and rotation.
• Major sector players and top holdings like NVIDIA, TSM, and Broadcom show bullish trends, driving sector momentum.
• SMH’s contracting range and converging moving averages suggest a powerful breakout might occur in the near term.

After months of consolidation, the semiconductor sector looks poised for a significant breakout, reigniting investor interest in this recent market-leading industry. Following a strong run in 2023 and the first half of 2024, semiconductors faced challenges midyear. A sharp selloff in July, triggered by growing expectations of Federal Reserve rate cuts, saw a rotation out of growth sectors like semiconductors into more defensive areas such as Utilities and Industrials.

The VanEck Semiconductor ETF NASDAQ: SMH, a sector benchmark, plunged from an all-time high above $280 to test crucial support near $200. This steep drop fueled fears of a prolonged downturn.

However, the sector recovered in late 2024, buoyed by stellar earnings reports from top holdings such as NVIDIA NASDAQ: NVDA and Broadcom NASDAQ: AVGO. SMH has since spent several months consolidating in a bullish technical pattern, hovering around key moving averages.

Last Friday’s mini-breakout and a strong overall market rally suggest a potential resurgence. Investors are now closely watching the ETF’s approach to critical resistance levels, which could mark the beginning of a new uptrend.

SMH Technicals Signal a Breakout

From a technical perspective, SMH presents one of the most compelling setups in the market.

The ETF has formed a contracting range, with its major moving averages converging, a pattern often called the “rubber-band” effect.

This setup typically precedes a significant directional move.

A breakout above $255, followed by $260, would confirm this bullish pattern and open the door for substantial upside.

Top Holdings Drive Momentum

NVIDIA, SMH’s largest holding with a nearly 20% weighting, has been a cornerstone of the semiconductor industry’s growth. After a more than 10% pullback from its 52-week high, NVDA reclaimed its 200-day SMA last week, closing the week near session highs on Friday.

The stock is now just 5.5% below its 52-week peak, supported by strong fundamentals and positive sentiment heading into CES 2025, where it will deliver a keynote presentation. Analysts remain bullish on NVIDIA, assigning a Moderate Buy rating with a consensus price target suggesting a 14% upside. With its leadership in AI and advanced chip technology, NVIDIA’s performance is critical to the broader sector’s outlook.

Taiwan Semiconductor Manufacturing NYSE: TSM, the ETF’s second-largest holding, also exhibits bullish signals.

The stock is trading less than 2% below its all-time high and is nearing a breakout above $210, which would mark the end of its consolidation phase.

As the primary manufacturer of NVIDIA’s high-demand Blackwell chips, TSM is uniquely positioned to benefit from surging AI-driven semiconductor demand.

Analysts share a positive outlook for the stock, with a Moderate Buy rating and forecasts for continued upside.

Broadcom, the third-largest holding in SMH, has maintained its upward trajectory, consolidating near record highs following its blockbuster earnings report in December.

The company’s robust growth and operational efficiency have solidified its position as a key player in the industry.

Broadcom’s performance reinforces the bullish narrative for SMH and highlights the sector’s resilience.

Analysts currently rate Broadcom as a Moderate Buy, reflecting confidence in its strong fundamentals and market position. Investors are watching closely for the company’s next strategic moves in 2025.

The Bottom Line

The semiconductor sector appears poised for a renewed rally and breakout, with the VanEck Semiconductor ETF nearing key resistance levels and showing a strong technical setup. Months of consolidation, improving sentiment, and robust performances from top holdings like NVIDIA, Taiwan Semiconductor Manufacturing, and Broadcom indicate the potential for a significant breakout and rotation back into the sector.

Investors should focus on the sector’s favorable positioning and the bullish momentum building within its top holdings. As semiconductors regain traction, the sector could present a compelling opportunity for those looking to capitalize on its growth potential and technical setup. The coming days and weeks will prove pivotal in shaping the next phase of its market performance.