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From the spring of 2003 low, the semiconductor sector raced ahead and topped concurrent with the US stock market at about New Year's of 2004, after gaining about 100%. The semiconductors then corrected over the next 2-1/2 quarters and gave back most of their previous advance. While most stock market sectors, both in the US and abroad are now forging ahead and nearing or bettering all time highs, the semiconductor sector appears to be struggling somewhat. Below is a 3-year weekly chart of the semiconductor iShare ETF. (Note: the more liquid and popular semiconductor ETF, semiconductor holders (SMH) ETF contains disproportionate amounts of Intel and Applied Materials.) The intermediate term MACD indicator shows the Semiconductor holders index are currently on a recent “sell” signal. The relative strength (compared to the S&P 500) indicates a decisively broken uptrend. Similar to 2004, the semiconductors may have made a top on or about New Year's of 2006. But while the general market indices have generally already surpassed their 2004 highs, the semiconductors recent New Year's high was about 11% lower than the 2004 high. Barring an unforeseen rally, the semiconductor ETF’s 10 week moving average will cross below its 40 week moving average in about a week or so. This would be bearish for the sector in the intermediate term.
It is tempting to find an important lagging sector, and then declare, “Ah Ha! The market looks weak.” Yet, there is danger in such an approach. There are also reasons to suggest that a rally in the semiconductor sector may be coming. It is not all bearish in the sector. For example, of the top 10 stocks comprising the semiconductors iShares ETF, 6 (60%) have a bullish point-and-figure charts. The largest company within the index in terms of market capitalization, Intel, will provide insight into the entire sector and more importantly, the overall US stock market. While I would like to think that these technical observations clearly suggest that I am a genius, the reality of the situation is that Intel is at the bottom of a (too) obvious trading range. There are numerous hedge funds trading this (obvious) range. In the market environment we have been in for the last couple of years, trading this range from the long side should be pretty easy. But is it actually free money with low risk? Maybe this time it will be. Yet it is my contention that there is risk in this apparent “free money” that may eventually burn a lot of technicians with a crash. Yet, until it does, I’m just rationalizing. My conclusion is that if Intel stays true to its range, it will be bullish for the market. Yet the large width of the trading range suggest that if Intel breaks below the trading range, it will likely result in a price objective of about 12.5 or less, and this will be quite bearish for the US stock market.
Another important stock, Texas Instruments’ behavior over the next few weeks will provide important insight into the general market. The price action appears to be in a bullish ascending right triangle pattern. But its relative strength price chart is in a bearish descending right triangle pattern. Over the next couple of weeks, we should know which the dominant pattern is.
Wednesday’s close of Motorola was the same as its 10 and 40 week moving averages. A break below 20 would be technically bearish, and a break above, bullish.
Analog Devices finds itself at a critical technical juncture, near the top of a trading range with the shorter term moving average about to cross below the longer term moving average. It also shows a loss of MACD momentum.
Applied Materials shows a loss of momentum, and it now resides below both its 10 and 40 week moving averages. It appears ready to bounce from 17.5, a former resistance level that is now support.
Advanced Micro Devices (AMD) had had a fabulous recent run as folks have discovered that Intel has not cornered the market on computer processors. Eventually there is likely to be competition for both of these companies. But the more important issue to speculators is whether AMD will rise above the red line or swoon below the blue line over the next few weeks.
There’s a similar technical situation for Broadcom.
Marvell Technology Group (MRVL) after a 700 percent gain has reversed and now sits near its up trendline and its 40 week moving average. A break below these will have technical importance; but until it happens, this is just conversation.
Particularly bearish in the long term is the chart of Maximum Integrated Products (MXIM). Yet it is overextended to the downside and not a good entry point to play the long term downtrend.
ST Microelectronics is in an uptrend.
Today’s Market More on the semiconductor sector follows. The Philadelphia Semiconductor Index was up about 1/2 percent in a generally down market. Its point-and-figure chart suggests a bearish target of 10% below its current level of about 500. However, a rally to 515 turns the picture bullish.
Today’s action didn’t produce a single change in any of the point-and-figure charts of the stocks discussed above. It’s still 6 bullish, 4 bearish. However, the semiconductor group, an intermediate-term lagging sector, appears subject to a sharp and useful short term bullish bounce based on several daily momentum indicators. Why sharp? Because that is what these stocks do. Yet, failure to produce this sharp bounce would likely suggest a change of the market’s character from bullish to bearish. I have my eyes fixed on Intel, as it failed to produce the bounce that anyone of average intelligence could predict based on its well-defined trading range. Intel now sits just about on top of its support within its trading range. One day (maybe not tomorrow), the market that has been true to the technical analysis practiced by swing traders is going to change and catch almost everyone off guard.
The bond market dropped today (interest rates were higher). Now the benefit of the doubt must be given to the bond bears, as 4.675% on the 10-year Treasury note, former resistance, appears to have held as support.
There was interesting action in the homebuilders that I would like to mention, and that is the price action in the homebuilder ETF versus the individual stocks. The tear sheet for the ETF Symbol XHB describes the fund: “The SPDR Homebuilders ETF seeks to replicate as closely as possible, before expenses, the performance of an index derived from the homebuilding segment of a U.S. total market composite index.” The ETF, which trades about 350,000 shares in an average, traded up 2.6%, yet practically all of the major homebuilders traded up between 3 and 5%. The Dow Jones homebuilding index traded up 3.6%, and the $HGX traded up 2.2%. Ah ha… there lies the discrepancy. The $HGX contains some financials such as Radian (RDN) and some materials stocks such as Vulcan Materials and Weyerhaeuser Co. It therefore appears that the SPDR Homebuilders ETF probably also contains components such as these. That would be the most reasonable explanation. In spite of the good news out of KB Homes, with interest rates headed up, and after having observed several “For Sale” signs in my area containing a note that says, “New Price,” it is my conclusion that this is a sucker’s rally. Thirty six (36) is an important technical level for Toll Brothers.
In spite of a healthy correction in the gold bugs index, Gold Corp. remains relatively strong as shown in the weekly chart.
Let’s see whether Platinum breaks higher from its triangular continuation pattern.
Feel free to write; I answer my email. Have a great evening. Martin Goldberg
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