By: Costas Bocelli — July 24, 2019
Is the Breakout in the Semiconductors the Real Deal?
Could you live without your smartphone?
Ask my 12 year old son and he'd say it would be the end of him.
I know he’s being a bit dramatic. But the reality is he and the rest of the world are addicted to high-tech gadgets and the connectivity they bring.
And at the center of it all is the Semiconductors industry. Anything that’s computerized or uses ultra-high frequency radio waves depends on semiconductors.
That’s right, all that cool software and those amazing apps we download aren't possible without microchips, transistors and diodes all packed tightly into those nifty devices.
The Semiconductors is a booming industry. And it goes far beyond smartphone devices. Artificial Intelligence and autonomous driving are two futuristic concepts now becoming reality thanks to semiconductors.
And then there’s mobile communications. The roll-out of the next generation (5G) infrastructure upgrade which will exponentially increase the speeds we can transmit data over wireless networks. Semiconductors will be a major contributor to the 5G ecosystem.
Just have a look at the big breakouts in Teradyne (TER) and Texas Instruments (TXN) earlier this week. Both semiconductor companies delivered a strong earnings beat and guided above expectations looking ahead.
(Click any image to enlarge)
And it’s not just these two companies.
As a group, the Semiconductors sector is providing strong leadership within the entire U.S. Equities asset class.
Look at the Vaneck Vectors Semiconductor ETF (SMH) which recently surpassed its April highs and is hitting a new all-time record high. The SMH is a fund comprised of a basket of the world’s leading semiconductor companies.
The SMH has gained +40% since the beginning of the year and +25% off of the late-May correction low. That’s more than double the gains of the S&P 500, the primary benchmark for U.S. Equities.
But the group isn’t immune to downturns either. Within the past two years, each subsequent up cycle has been followed by a down cycle. Escalation of trade tensions with China, tariffs, and fears of slowing global growth have caused investors to flee the "Semis".
To be sure, the semiconductors can be a volatile group. But it can also be a rewarding group too, particularly when bullish momentum is strong like it is right now.
So the recent breakout in the SMH is one to pay close attention to. In fact, any near-term weakness should be viewed as an opportunity to buy and accumulate bullish positions that have exposure to the group.
If we look to the “true market”, many of our internal indicators are flashing a “green light” and show this group is being aggressively accumulated by large institutions and fast-money traders.
Take the Semiconductors Bullish Percent Index (BPI) which measures the percentage of stocks within the sector that are on “buy signals”.
Currently, 60% of the stocks within the sector are on “buy signals”. That’s up from just 36% in late-May and into early-June, just when the stock market and the Semi’s began to rally.
Back on June 10th subscribers to Sector Prophets Pro, our data analytics product, received a bullish alert that the indicator had received a status upgrade, and that demand had returned.
Readers who acted on this information, virtually invisible to the mass public, were able to capture the bulk of the gains off of the May correction low.
As we mentioned earlier, the semiconductors have been outperforming the broad market (S&P 500 index) since the beginning of the year, and especially during the rally off of the May correction lows.
That’s huge bullish momentum.
In Sector Prophets Pro, we can track the relative performance of the sector versus the equally-weighted S&P 500 by tracking the price data and plotting it on a Relative Strength Chart.
Here is what it currently looks like:
The easiest interpretation of the RS chart is that when it is in a column of X’s -- like it is now --the sector is demonstrating positive relative strength versus the broad market.
In other words, this group is outperforming the stock market, and is a good place to search for ideas that can generate superior returns.
And when the chart flips to O’s, the group is underperforming the broad market, and it might a group to avoid. Or to trim any bullish exposure you might have.
Then there is the %30 week MA indicator which is a bit more sensitive, but just as valuable a tool when sizing up the true strength of a sector.
The %30 week MA measures the percentage of stocks within a group (in this example, the semiconductors) that are trading above their respective 30-week (150-day) simple moving average.
When the indicator is in a column of X’s and rising, it tells us that more stocks are breaking above the 30-week moving average. This is particularly useful after a period of weakness (such as late-May) as it usually is an early signal that demand is returning to the group. Changes in the supply/demand relationship will show up in this indicator ahead of any significant changes in the BPI indicator.
Stocks moving from below their 30-week MA to above their 30-week MA is considered a bullish indication. So when there is a meaningful change in the number of stocks breaching this key technical trend level, it’s something to pay attention to.
In summary, while the semiconductors are breaking out to new highs, the “true market” is confirming the strength which should give investors the confidence to buy and accumulate high quality stocks, particularly on any near-term weakness.
So get your shopping list of ideas ready.
Or better yet…
Let’s take the stress out of it altogether and let my friend and colleague Chris Rowe hand pick the next big winner for you.
In just a few hours, Chris Rowe will be hosting a Stressless Trading Summit where he’ll go into more detail about these “true market” indicators and reveal his trading strategies and best ideas for banking superior returns.
You definitely want to check out this exclusive event taking place at 1pm eastern this afternoon. So click here now to secure one of the few remaining spots before the presentation goes live.
Until next time!