Key Points
- Investors are growing concerned with the weakness in semiconductor stocks.
- Semiconductor stocks tend to lead the broader stocks market.
- A looming trade war with China may be to blame.
Semiconductor companies have been in focus as of late, because many investors believe they are a leading indicator of the overall health of the economy. Many analysts and firms are starting to worry about the economic future of these companies.
On the other hand, it seems for every bearish article, there is another article telling you to ignore the bears. So what is going on in the semiconductor industry?
What are Semiconductor Companies?
Semiconductor company makes microchips for computers. They are constantly trying to make smaller, and faster microchips to be used in various devices. Many consumer goods, such as smartphones and laptops, use semiconductors to contain the flow of energy within the device.
In today’s world, nearly everything uses a semiconductor. As microchips become smaller, faster, and more efficient, they can be added to more products, and smaller devices. They help make things, like refrigerators and cars, more efficient and convenient.
Because of the widespread use in both industrial and consumer products, many investors see the semiconductor industry as a leading signal of the economy.
In the rest of the blog, we will analyze the industry and how it may affect the broader market. We will use the Philadelphia Semiconductor Index and the SPDR S&P Semiconductor ETF – XSD to perform the analysis.
Philadelphia SOX Index
“The PHLX Semiconductor Sector Index (SOXSM) is a modified market capitalization-weighted index composed of companies primarily involved in the design, distribution, manufacture, and sale of semiconductors” (Source)).
The index is currently in a long-term uptrend, which began in late 2008, a few months before the S&P 500 bottomed. Since, the price moved between a narrowing channel, before breaking out above the top of the channel in late 2016. Today, the index has reached its Dotcom Bubble peak price and is in a diamond formation.
The diamond formation is generally considered a bearish top. The pattern is characterized as increased volatility and wide price swings. The pattern begins as a widening formation, where price reaches higher highs and lower lows. It then moves into the tightening phase where it makes lower highs and higher lows.
While the index is in what is considered a topping pattern, what we don’t know is how important the top is, or if it is even a top. While technical patterns are generally characterized as a continuation or a reversal, that does not they always behave that way.
If it is a top, is it a top of the minor trend or the major trend? The index has already broken its minor uptrend, but is there more to it? We will have to wait to find out.
S&P Semiconductor ETF
The ETF does not look so concerning. The index has generally remained above its 200-day moving average, and continues to make new highs. In comparison, the SOX index has not made a new high since March, while this ETF’s most recent high was on September 5th. In fact, the ETF has maintained its minor uptrend from 2016, and shows a lot more strength than the SOX index.
Problems Facing the Industry
Investors are worried struggling semiconductor stocks are an early sign of a weakening economy. However, we know the U.S. economy is still strong, and recent data reinforces this notion.
China’s economy has slowed, and this could be affecting the outlook of the stocks. While recent data released from China stated second quarter GDP growth of 6.7% over the year before, the Chinese stock market has seen some real weakness throughout 2018. This could be signaling a weaker economy than the GDP data shows, and a slowing Chinese economy could hurt the semiconductor industry, as demand weakens.
Trade War
A trade war between these two nations could be the real problem. Trade rhetoric continues to ratchet higher, and this could be scaring investors away from these stocks. U.S. semiconductors account for 50% of global market share, and they are the fourth largest U.S. export by value (Source)).
The U.S. semiconductor industry is extremely intertwined with eastern Asia. Due to costs, many U.S. companies use eastern Asian labor to produce chips. A trade war between the U.S and China could end up hurting these companies on both the production and sales side of their businesses.
On top of that, these imports/exports are generally not the final goods that companies sell to consumers. They are intermediary goods that go into final goods. This means the chips could go through tariffs multiple times, in either country.
Stocks We Watch
Here are some semiconductor stocks we have recently traded:
Micron - Sold 8/15/2018
- The stock has broken the uptrend, and has broken a support around $45.50.
- The next support to watch out for is at $39.50.
- If the stock continues to fall, the key support to watch out for is $35.
Intel - Sold 9/11/2018
- The stock has recently fallen through a $47 support.
- The key support is at $42.
AMD - Purchased 5/30/2018
- The stock has had an incredible run.
- Has broken out of a descending triangle, and has moved up higher with a large amount of volume.
- The key support is the minor uptrend line it is in, and the previous peak around $15.79.
Do Semis Lead the S&P 500?
t does seem that the SOX index leads the broader stock market. The green vertical lines are the peak highs and lows for the SOX, while the blue lines represent the peak highs and lows of the S&P 500. The SOX tends to peak before the broader index, fairly consistently. If it doesn’t peak prior, than they peak at the same time.
The SOX index has not made a new high since March, while the S&P 500 has. This could be a worrying sign, because the SOX does not confirm the new highs in the major index. However, the XSD ETF has made new highs recently, and it confirms the highs in the S&P 500. These mixed signals mean there is no signal.
Conclusion
The main reason semiconductors have struggled this year is likely due to the trade war between the U.S. and China. The diamond pattern in the SOX index indicates investor are concerned with trade.
Trade rhetoric has grown more aggressive, but we haven’t seen the effects on the economy yet. The risk is there, but it hasn’t spread to companies or consumers.
Investors do not want to take on too much risk in case trade policy turns out of favor, but they do not want to sell in case the problems never pan out. Investors are still waiting for more information before adding or withdrawing money from these stocks.
One good sign is the fact that the XSD – SPDR S&P Semiconductor ETF is not in a topping pattern. If the industry were really in trouble, we would expect both of the charts to look worrisome. Instead, we are seeing the ETF continue to trudge higher. The diamond top in the SOX index may just be a reaction to resistance from the Dotcom Bubble highs in 2000.
In short, investors shouldn’t worry about weakening semiconductor stocks leading the S&P 500 into a bear market. The current situation isn’t a sign of a weakening fundamentals or technicals. Investors should be worried about a trade war hurting the stock market and economy, including the semiconductor industry.
Visit https://www.brtechnicals.com/trade-rhetoric-impacting-semiconductor-stocks/ to see all of our charts!
Submitted September 17, 2018 at 06:05PM by BR-Technicals https://ift.tt/2MJKXHj
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