From the desk of Tom Bruni @BruniCharting
The Nasdaq Composite closed at another all-time high yesterday, but some are questioning this rally’s sustainability due to the under-performance of the Semiconductor Index. Given we’re open-minded about our bullish Technology thesis, we want to use this post to take explore the sector’s recent performance and its possible implications.
Let’s start with a basic weekly line chart of the PHLX Semiconductor Index. For the last 9 months prices have been trading around their 2000 closing highs of 1,330 while momentum remains in a bullish range is working off its bearish divergence through time, rather than price. After prices rallied 150% over 2 years into a key resistance level, these developments should be expected, and as of now there’s little to suggest this is anything more than a pause within a structural uptrend.
Below is a chart of the 30 PHLX Semiconductor Index components with some performance metrics we find relevant. What I want to focus on here is that since the Semiconductor Index made a new high on July 26, 2016, its median component is up 71% and only 1 of the 30 have a negative price return over this period (-2.16%). The index itself is up 81.3% in 2 years and is still up 8% year-to-date despite the sideways action, compared to 55% and 15% for the Nasdaq Composite.
Click on table to enlarge view.
The point of these stats is to highlight that these stocks have all had massive runs over the last two years. Prices don’t go up in a straight line and they don’t go down in a straight line, so shifts from an uptrend to a sideways trend are not inherently bearish. In fact, periods of price consolidation are normal and tend to resolve themselves in the direction of the underlying trend, which in this case is most certainly higher.
The next thing we want to look at is Semiconductor performance on a relative basis. One chart we’ve seen floating around is the Semiconductor Index relative to the Nasdaq Composite on a year-to-date basis.
If you look at this ratio over the short-term you see it moving from the upper left to the lower right, but if you zoom out for a structural perspective of the chart you’ll see that prices broke out of a 9-year base in early 2017 and are now coming back to retest that breakout area. Momentum remains in a bullish range and the 200-week moving average remains higher, so unless we see prices fail this retest and fall back into that 9-year range, this looks like a correction within a structural uptrend. Again, pretty standard stuff.
Semiconductors also broke out of a 9-year base relative to the S&P 500 2 years ago and are now consolidating around the 38.2% retracement of the 2000-2008 decline as momentum works off its bearish divergence and the 200-week moving average catches up.
The takeaway is that Semiconductors have been under-performing the broader market indexes year-to-date, and that one is correcting through time while the other is correcting through price. Additionally, these long-term charts tell us that until a lower low is made, the long-term trend in both of these ratios remains higher despite the short-term noise.
The Bottom Line: The bullish thesis for Technology stocks as a group includes the Semiconductor Index participating to the upside. History has shown a strong correlation between the absolute price performance of the Semiconductor Index and the Nasdaq Composite, however evidence for the thesis that out-performance from this sector is needed for the broader market to go higher is mixed at best. Sometimes it leads, other times it lags. Sector rotation is the lifeblood of a bull market and this time is no different.
We’ll keep an eye on the 2000 closing highs and the index’s performance relative to the Nasdaq and S&P 500 for new lows, but for now the weight of the evidence continues to suggest that this this consolidation in the index and its components is a healthy development and much needed pause after its roughly 150% gains from the 2016 lows.
Until this consolidation resolves itself we continue to want to focus on other areas of the market showing relative strength, but Premium Members can click here for a deep dive into the sector’s components where we outline the stocks that may lead if/when this consolidation resolves higher.
Thanks for reading and let us know if you have any questions!