NVIDIA's Overbought Rally and the Geopolitical Semiconductor Surge: Time to Buy SMH Before the Surge?

The semiconductor sector is at a pivotal crossroads. NVIDIA’s (NVDA) earnings report on May 28, 2025, triggered a wave of momentum, even as its technical indicators flash warnings of overbought conditions. Meanwhile, geopolitical tailwinds—including Saudi Arabia’s $11.10 billion semiconductor ambitions and record defense spending—are fueling demand for chips. For investors, the question is clear: Should you buy into this rally, or is the risk of a pullback too great?

Technical Indicators: A Bullish Dilemma

NVIDIA’s stock price has surged to $135.57, with its 14-day RSI hitting 73.04—deep into overbought territory. Historically, such readings often precede corrections. Yet, the technical picture isn’t all doom and gloom.

• MACD: Positive divergence suggests momentum remains intact despite overbought conditions.
• Moving Averages: All key averages (50-day, 200-day) are below the current price, signaling bullish sentiment.
• Resistance Levels: The $134.43 resistance has been breached, with a breakout above $135.49 likely triggering a "strong buy" signal.

The Contradiction: While RSI and oscillators warn of short-term risk, the stock’s upward trajectory since late 2024 (+40%) suggests a strong appetite for AI-driven growth. A stop-loss at $129.67 (12% below current prices) could mitigate downside risk, while the $94.68 support level offers a long-term floor.

Geopolitical Tailwinds: Saudi Arabia’s Semiconductor Gold Rush

The Kingdom’s Vision 2030 plan is transforming its economy, with semiconductors at the core.

• Defense-Driven Demand: Saudi Arabia’s $80 billion defense budget (2024) is fueling partnerships like its $142 billion U.S. arms deal. This includes 18,000 NVIDIA GB300 Grace Blackwell processors for AI infrastructure, with potential orders scaling to hundreds of thousands over five years.
• AI Infrastructure Boom: The $100 billion Alat project aims to build a 500 MW AI data center, powered by NVIDIA chips. Analysts at Bank of America estimate this could generate $3–$5 billion annually in chip sales for U.S. firms like NVIDIA.
• Market Growth: The Saudi semiconductor market is projected to hit $11.10 billion by 2033, growing at a 5.9% CAGR—driven by 5G, EVs, and defense tech.

Investment Strategy: SMH ETFs and AI Leaders, With Caution

The semiconductor sector’s tailwinds justify strategic buying—but investors must balance optimism with discipline.

1. Semiconductor ETFs (SMH): The Play for Diversification

The VanEck Vectors Semiconductor ETF (SMH) offers broad exposure to the sector’s upside.

• Why SMH Now?: SMH holds 15% in NVIDIA and 25% in defense/industrial chip leaders like Texas Instruments (TXN) and Analog Devices (ADI). With geopolitical demand surging, SMH could outperform broader markets.
• Risk Management: Use limit orders to buy dips below $365 (current price: $380) and set trailing stops to lock in gains.

2. NVIDIA: A Core Position, but Avoid Overexposure

NVIDIA’s AI dominance is unmatched, with its chips powering everything from Saudi data centers to U.S. military systems. However, its RSI over 70 demands caution:
- Target Entry Points: Wait for a pullback to $125–$130 (post-earnings volatility could create this opportunity).
- Allocate Sparingly: Treat it as a “growth kicker” in a diversified portfolio, not a core holding.

3. Geopolitical Plays: Focus on Defense and AI Partners

• L3Harris Technologies (LHX): A key partner in Saudi defense projects, benefiting from software-defined radio systems and AI integration.
• Applied Materials (AMAT): Critical for semiconductor fabrication tools in Saudi’s $266 million National Semiconductor Hub.

The Red Flags: Valuation and Volatility

While the sector’s fundamentals are strong, risks lurk:
- Overvaluation: NVIDIA’s P/E ratio of 60+ is elevated compared to its 5-year average of 35. A correction could be sharp.
- Geopolitical Risks: U.S.-Saudi chip deals face scrutiny over end-user compliance. A single scandal could spook investors.
- Supply Chain Constraints: Wafer shortages and rising R&D costs could squeeze margins.

Conclusion: Ride the Momentum, But Stay Tactical

The semiconductor sector is primed for growth, driven by AI, defense spending, and Saudi Arabia’s tech ambitions. NVIDIA’s technical overbought signal is a hurdle, but it’s one that could be overcome if geopolitical tailwinds remain strong.

Action Steps:
1. Buy SMH dips to capture sector-wide momentum.
2. Target NVIDIA on weakness below $130, with a stop-loss at $125.
3. Avoid overcommitment: Keep semiconductor exposure under 10% of your portfolio until valuations normalize.

The rally isn’t over—yet. But investors must be ready to act swiftly when the next pullback arrives.

Final Note: Monitor NVIDIA’s post-earnings volatility and Saudi’s Q2 semiconductor sales reports for confirmation of this thesis.