Your Semiconductor Stock Cheat Sheet For May

Subscribers to our Substack, The Contrarian Edge, received this commentary on Saturday, May 2.

The Nasdaq Composite’s (IXIC) historic win streak is nothing but quantitative fodder two weeks later. Such is the way of Wall Street, where we’re all prisoners of the moment. But while the Nasdaq has since see-sawed its way to 25,000, the PHLX Semiconductor Index (SOX) has kept on plugging, eventually racking up an 18-day win streak before giving back 1% on Monday. The subsequent two-day breather was short-lived, with SOX reclaiming $500 on Thursday and holding it on Friday.

Over that win streak timeframe, the semiconductor-specific index added nearly 45%, with Nvidia (NVDA) chipping in a 22% gain concurrently. The market cap leader has run its 14-Day Relative Strength Index (RSI) toward the cusp of ‘overbought territory’, while the SOX’s RSI is deeper in the woods at 75.

Factor in the inflation overhang and stubborn geopolitical impasses, and skittish investors would be forgiven if they were bracing for pullback. While that may come, many semiconductor stocks are entering a historically bullish month.

Below are the best S&P 500 stocks to own in May, historically, in the last 10 years. Of those 25, 13 fall into the semiconductor sector, including NVDA’s 17.4% average monthly return and 90%-win rate. Of those 13, 11 are SOX components.

Beyond their healthy May returns, here are some takeaways from that list of outperformers. Consider this your tech sector cheat sheet for May.

• Analog Devices (ADI): One of the heavier put skews – across 10- and 50-day timeframes – on the list.
• Applied Materials (AMAT): A Schaeffer’s Volatility Scorecard (SVS) of 92, plus a double bottom forming on the charts, and an RSI nowhere near overbought.
• Broadcom (AVGO): One of the top relative strength leaders. And with earnings over a month away, a Schaeffer’s Volatility Index (SVI) in the 6th percentile of its annual range.
• KLA Corp (KLAC): 10 analysts on the sidelines with “hold” ratings, and a RSI that’s not scaring anyone.
• Lam Research (LRCX): Heavy put skew across multiple timeframes and pulling back to prior highs. Interesting.
• Microchip Technology (MCHP): A high SVS of 94, and 5.2% of the stock’s total available float sold short.
• Micron Technology (MU): A SVS of 91, but not a whole lot of contrarian potential for this beast.
• NVDA: Cheap options, if you’re into that sort of thing.
• ON Semiconductor (ON): The underappreciated one of the bunch. A healthy 7.7% of the stock’s total available float sold short, and 19 of the 33 brokerages covering with “holds.”
• Teradyne (TER): A rare relative strength laggard, but still in the uptrend channel.
• Texas Instruments (TXN): Plenty of naysayers that can be swayed in the coming months. And is that a bull flag pattern forming?

Here’s a little secret; the reason for Nvidia’s stellar May record has been earnings reports that have fallen on May in recent years. Last May, the shares added 3.2% post-report. In May 2024, they gapped higher by 9.3%. The catalyst behind the bullish seasonality lies in the upbeat post-earnings reactions.

That puts four other stocks in the crosshairs this month. Beyond Nvidia, ON Semiconductor (ON), Microchip Technology (MCHP), Analog Devices (ADI), and Applied Materials (AMAT) report earnings during their historically-strong month. Below are their earnings histories, going back two years, or eight reports.

AMAT and MCHP are working uphill against some lackluster results lately. For ON, the options market is pricing in a 12.3% move, nearly double its average post-earnings move – regardless of direction – in the last two years. The same applies for Microchip. For the companies reporting later than a week ahead, their implied earnings moves were not yet available.

Beyond individual equities, Rocky also has seasonal data for exchange-traded funds (ETFs). The VanEck Semiconductor ETF (SMH) averages a May return of 6.8% in May over the last decade and is one of only two tracked ETFs with a 90%-win rate. So, if none of these quantitative returns appeal to you, and you just can’t find a semiconductor stock to trust, why not trust them all, together?