Semiconductor shares were set to snap their longest winning streak in five months on Wednesday. Beneath the rally, the cost of insuring chipmakers against default has been rising alongside their stock prices, a split one analyst says has ended badly before.
The semiconductor rally hit its first real speed bump on Wednesday. The iShares Semiconductor ETF fell 1.3% in premarket trading, with 29 of its 30 holdings lower, putting the group on course for its first loss in seven sessions. The fund had gained 15.2% over a six-day winning streak through Tuesday, its longest since an 18-session run that ended April 24.
The run had been powerful. Advanced Micro Devices hit a fresh record this week, Nvidia sits just below its peak for the year, and Broadcom has climbed 7.4% over the past five sessions. The Nasdaq Composite closed at a record on Tuesday.
The warning sign sits in a different market. Michael Kramer of Mott Capital Management notes that while chip stocks have been rising, so have the prices of five-year credit default swaps on the same companies, the contracts investors buy to insure against a default.
"Generally, the relationship between a stock and its CDS is inverse, as we would expect growing concerns about credit risk to weigh on equity valuations and drive the stock price lower," Kramer wrote. "We have seen this divergence before, and if I remember correctly, the previous rally in semis did not last."
A second crack shows up inside the sector itself. The PHLX Semiconductor Index is still about 14% below its June high, and only three of its components are closer to their own highs than the index is. Ten names, representing about a third of the index, remain more than 30% below their 52-week highs, and the average member is off about 26%, BTIG technical strategist Jonathan Krinsky calculates.
"We've seen this before," Krinsky wrote, pointing to 2000, when the index peaked on March 14 but many individual members kept making new highs afterward. His advice for bulls is selective rather than broad: "we would focus on those names near new highs rather than the laggards."
Not everyone reads the credit signals as a threat. HSBC strategists, who remain what they call "max overweight" on equities, said Wednesday that hyperscaler credit spreads have shown signs of peaking, a point that matters because the largest cloud companies are among the chip sector's biggest customers.
For investors, the rally now comes with two caveats. Leadership is narrow, concentrated in a handful of names near their highs while much of the index lags, and the credit market is charging more to insure the same companies equity investors have been bidding up. Neither guarantees a reversal. Together, they suggest the next leg of the chip trade will depend more on stock selection than on owning the whole group.