Philadelphia Semiconductor Index likely to retreat after recent rally
THE Philadelphia Semiconductor Index (SOX) is a modified capitalisation-weighted index which tracks the performance of US-listed equities in the semiconductor sector. Following a strong rally in the second quarter of this year, the index corrected 28 per cent from the 14,655 swing high, from Jun 22 to Jul 29, and formed a swing low at 10,445. Subsequently, the index rebounded over 14 per cent in two weeks, retesting the 12,000 level at the time of writing.
The recent rebound in the SOX could be attributed to several factors.
Major hyperscalers reaffirmed and raised their guidance for AI capital expenditure in their recent second-quarter results. Amazon, which currently has the highest annual capital expenditure forecast among the hyperscalers, lifted its projected capital expenditure from US$200 billion to US$220 billion this year. Alphabet, which ranks second in capital expenditure spending among the hyperscalers, raised its forecast to a range of US$195 billion to US$205 billion, up from the previous US$180 billion to US$190 billion. Accelerated demand for cloud infrastructure, custom AI chips and new data centre capacity were among the main drivers behind the revised capital expenditure forecasts. This directly addressed investor fears that AI infrastructure spending was slowing or peaking. Additionally, signs of exhaustion in bearish positioning across semiconductor equities may have paved the way for a rebound after deleveraging and liquidation of crowded positions.
During the strong rally in the second quarter, retail investors, trend-following quantitative funds managed by Commodity Trading Advisors and hedge funds were heavily leveraged in high-momentum semiconductor stocks and exchange-trade funds. As the index pulled back from the peak, the resulting margin calls triggered systematic deleveraging and cleared away technical overhead, allowing the recent rebound to take place.
From a technical perspective, the SOX is likely to pull back after the recent rebound brought it towards a key resistance area. The index has retested the 30-day simple moving average at 12,000, which is likely to act as resistance, given that it previously served as a dynamic support before breaking down at the end of June. The 12,000 level is also confluent with a previous key horizontal support level from the beginning of June to mid-July. In addition, the recent rebound has also brought the index close to a 50 per cent Fibonacci retracement level at 12,550, using the swing high of 14,655 formed on Jun 22 and the swing low of 10,445 formed on Jul 29. The Moving Average Convergence Divergence technical indicator also suggests that the momentum may be losing steam, with its histogram having rebounded towards the zero line, which is likely to act as resistance after a breakdown below zero in mid-July.
To conclude, the recent rebound in the SOX came after reassurance from hyperscalers on AI capital expenditures and deleveraging of crowded positions in the semiconductor sector. However, the retesting of the 12,000 to 12,600 area would likely hold as a near-term resistance for the index to pull back. The 11,700 level is an important support for the index to hold; a breakdown would trigger further weakness to retest the 11,000 level.
The writer is a senior research analyst at Phillip Securities Research
