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Today's Market WrapUp 04.12.2007 Mon Tue Wed Thu Fri Goldberg Archive The
Important Semiconductor Tug of War
There are three aspects of the semiconductor industry that make the action of their stocks important to the stock market. These are:
Given the importance of the semiconductor sector to the overall market, the long term chart of the semiconductor sector is compelling because of its decidedly undecided nature. Below is the long term chart of the Philadelphia semiconductor index ($SOX). Since the 2000 stock market top the SOX index has made a continual pattern of higher lows and lower highs. Recently the index has settled into a triangular pattern where it is now on what can be described as “mid-field.” It would be logical to surmise that a healthy or at least neutral semiconductor index chart would be needed to support the continuation of a bull market. For this reason, a breakout in either direction of the tight trading range would be important. Below is a one year daily chart with the most recent trading range annotated. Today’s close of about 476 is just about at midfield where it sits with the 50 and 200 day simple moving averages.
Similarly, the neutral and directionless nature of the semiconductor sector is apparent from the point-and-figure (PAF) chart.
While the sector may stay in “neutral” for awhile, I cannot picture any scenario where a break down or break out of the semi-conductor sector would not be important to the global economy and stock market. This is a trading range that may not be compelling to trade because it is so narrow, but the greater implications the future action of this index are clear and important. Today’s Market The late February selloff was attributed in part to the Chinese government saying they're going to crack down on speculators. Every sector was affected; among the hardest hit were commodities, which were riding high based on the belief that demand from China would only grow. The materials, energy, and technology sectors were also knocked down, while emerging-market companies and riskier small-cap stocks took a hit as investors fled to bonds. Since the market made a relatively fast bottom, stocks have been climbing and the climb has been led by emerging-market companies. In fact, the emerging market ETF (ticker symbol: EEM), made an all time high today as shown in the chart below.
It appears that after an initial scare, the fear dissipated as the EEM is again moving decisively up and volatility is now near multi-year lows. This appears reminiscent to the pre-1929 crash environment where availability of call money was threatened by the Federal Reserve. After a selloff, the Federal Reserve backed off their action as the stock market surged again. Did the Chinese government recently back off of their position of cracking down on speculators as the action in the EEM seems to be indicating? In any case, the market leaders such as emerging market stocks are again leading and for now, this casts a bullish overtone upon the market. If there is anything for bears to hold on to, it is that volume to the upside has been lower than the volume that occurs during (less frequent) down days. For followers of Investors Business Daily (IBD) it is notable that the market is working on two “distribution days,” and they are not finding a wealth of healthy breakouts either. The weekly charts of most major indices shows this week’s volume at a higher rate than last week’s, yet the weekly volume so far is far from decisively high. And as of Thursday evening, there is a weekly “hangman” candlestick. Of course this could change tomorrow. A decisive down day on higher volume would mark the 3rd IBD distribution day and this would also produce a bearish weekly candlestick, confirmed with higher weekly volume. This is illustrated below in Nasdaq 100 terms.
Finally, a few weeks ago, Motorola, Apple and Google were referenced as important indicator stocks. GOOG at 466 was cited as an important level for Google. Today GOOG closed at 466.99. The neckline at about $18 was cited as important for Motorola and MOT closed today at a less than decisive $17.5/share. Apple’s cup-with-handle pattern was cited, and as of today there is no breakout (or breakdown). Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
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