Thesis Confirmed; Chips Breaking Out
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Recent price action confirms our thesis that software would underperform chip stocks. Chips are rebounding off the 50% retracement level of their previous rally — a key technical support area.
Chip stocks have been coiling tightly in a range over the past several weeks. This is called a Volatility Contraction Pattern (VCP) and usually precedes a breakout in the direction of trend. We see bullish setups across major names including Micron, AMD, Intel, and Super Micro Computer.
An important catalyst this week was Broadcom’s earnings report in which they predicted a substantial increase in future sales. CEO Hock Tan highlighted massive multi-year customer commitments, reaffirming sustained Big Tech capital expenditure in infrastructure. Even though Broadcom’s own stock lagged the market, the read-through for AI is still strong.
With much of the prior positioning washed out, we think the aforementioned chip stocks make good short-term trades with favorable risk/reward setups.
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