Trading Nation

This hot trade could be showing cracks: Technician

Key Points
  • Semiconductor stocks just logged five straight weeks of gains.
  • The group is expecting substantial earnings growth.
  • But it may be showing some under-the-surface weakness.
Trading Nation: No dip for chip stocks

Semiconductor stocks just logged five straight weeks of gains, and while the group is expecting substantial earnings growth, it may be showing some under-the-surface weakness.

"We're looking at some really impressive growth when it comes to chipmakers. Not only are they seeing increased production, but they're also seeing higher prices," Erin Gibbs, S&P Global portfolio manager, said in an interview Friday on CNBC's "Power Lunch."

Gibbs pointed out that earnings growth forecasts have doubled from the beginning of the year, and are expecting about 22 percent growth for the industry. Furthermore, Gibbs is looking for 12 percent revenue growth as well.

"[There is] top line and bottom line big double-digit growth this year, coming off lackluster growth from the prior year," she said.

From a technical standpoint, however, semiconductor stocks have begun showing signs of cracking under the rally's surface.

"Right now, I'm starting to see some little divergences crop up when I look at the relative strength indexes, the [moving average convergence/divergence] indicators; they're not making new highs alongside the index itself," said Craig Johnson, technical analyst at Piper Jaffray.

The relative strength index as a technical indicator measures an asset's shifts in price change over a given period of time, while the moving average convergence/divergence indicator measures the relationship between an asset's moving averages.

Johnson said he would be cautious here, as the fundamental elements indeed appear positive, "but right now, I'd rather trim some off the table here and be selectively investing in some of the chip names than just all in on these names at this point in time."

The iShares PHLX Semiconductor ETF has risen more than 17 percent year to date and gained 1 percent by Friday's market close. The VanEck Vectors Semiconductor ETF, an exchange-traded fund that tracks the stocks, is up nearly the same percentage year to date and ended up more than 1 percent on Friday.