The bears may not be going anywhere on semiconductor stocks.

Quick insight: The VanEck Semiconductor ETF (SMH) — which counts Nvidia (NVDA), Taiwan Semiconductor (TSM), and Broadcom (AVGO) as its top three holdings — has begun to form a head-and-shoulders stock pattern, according to Yahoo Finance AlphaSpace chart analysis (below).

The left shoulder took shape starting in mid-May, with the head forming in late June, and now the right shoulder has emerged. The pattern will be official if the ETF falls below the May 19 closing low of $543. 

The head-and-shoulders pattern is widely considered bearish, as it suggests that buyers are gradually losing control of the market for a particular stock or ETF.

During the formation of the left shoulder and head, buyers can still push prices to new highs. But the inability to push higher on the right shoulder suggests that buyer demand is beginning to weaken. 

Once sellers push the stock below the neckline, many traders interpret that move as evidence that the prior uptrend has ended and that a new downtrend may be emerging.

The backstory: Investors are worrying that the AI spending boom may be cooling after years of extraordinary growth and soaring valuations. The sector is also facing concerns about potential export restrictions, tariffs, and geopolitical tensions that could disrupt chip sales to key international markets. 

At the same time, investors are questioning whether demand for AI chips can continue growing fast enough to justify the massive capital spending plans and lofty expectations baked into many semiconductor stock prices.

“We’re seeing the returns on investment,” AMD chair and CEO Lisa Su said, pushing back on the bearish narrative, on Yahoo Finance (see video above). “Demand for compute is at a premium today. … We are very confident in the demand picture being there.”

Bottom line: Another drop in the chips stock mustn’t be ruled out. The bears could remain in control as the bulls await more positive catalysts post-summer.

Evercore ISI strategist Julian Emanuel said about the action, “Ongoing worries of AI overspending, demand durability and ROI [return on investment] have resulted in profit taking churn being made more violent given the outsized gains already enjoyed by AI winners since the March lows.”

Brian Sozzi is Yahoo Finance’s Executive Editor, host of the Power Players with Brian Sozzi podcast, and a member of Yahoo Finance’s editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.

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