Monday morning, all seemed well. We were pushing up against levels that seemed to suggest an imminent move higher. 3 weeks ago, I had suggested that the correction was in its waning days, citing a potential break of 1130 on the S&P 500 as the ultimate level needed to gain confidence in that view. We opened last week with a strong day, closing near the high of 1129, just short of the June high. Four days later, we are lower by 2% than when I submitted the above-mentioned posting. While I think that this is noise (loud, painful noise) and the rally is likely to proceed, it's worth paying attention to a dynamic that reared its ugly head this week: Semiconductors Smackdown. The widely followed PHLX Semiconductor Index (SOX) lost 8.8% over the past four days, but, perhaps more alarmingly, it took out its summer lows [click charts to enlarge]:
Semiconductors and Equipment Makers tend to be the most volatile names in Technology and are a favorite playground for traders consequently. The higher "beta" is much less relatively than it was a decade ago, but it is true that the index is somewhat more volatile than Technology in general as well as the broad market. In any event, the above chart is likely to draw concern, as it indicates a series of lower highs and lower lows since the peak in April. In fact, the index has now pulled back more than 20% and, especially with the last week, it has now lagged the market over the past 5 months (and on a YTD basis, since it is down 10%). At its peak close on 4/26, it was up 11.4%, so it has certainly moved more than the S&P 500 as well as Technology.
In case you are not familiar, the index has 30 members and has been around since 1993. The weightings are based upon a modified market cap that caps the maximum exposure at 8% at the time of the monthly rebalancing. Here is a link to the index fact sheet, from which you can get the current weighting of the components:
|Company Name||Security Symbol||Market Percent|
|ADV MICRO DEVICES||AMD||3.54|
|AVAGO TECHNOLOGIES L||AVGO||3.63|
|CIRRUS LOGIC INC ##||CRUS||0.90|
|HITTITE MICROWAVE CO||HITT||0.98|
|K L A-TENCOR CORP||KLAC||3.78|
|LAM RESEARCH CORP||LRCX||3.75|
|MKS INSTRUMENTS IN##||MKSI||0.75|
|MARVELL TECH GROUP||MRVL||5.57|
|NOVELLUS SYSTEMS INC||NVLS||1.80|
|TAIWAN SEMICOND ADS||TSM||4.22|
|VEECO INSTRUMENT ##||VECO||1.23|
|MEMC ELECTRONIC MTRL||WFR||1.53|
Rather than get all worked up, I tend to think that this action is the tail wagging the dog. Traders ramped it up hard in April, yet it didn't lead to higher prices for the market in the ensuing months. On the flip side, I would suggest that this extreme weakness is nothing more than a reflection of the manic-depressive nature of the market these days. Take a look at the two-year view:
Not so scary, huh? First, we see that over the past two years, SOX has indeed been more volatile than the S&P 500. Also, over the past two years (as well as one year), it has marginally outperformed the market (that's the blue line).
Summer is typically tough for Technology and Semiconductor-related stocks relative to the rest of the market. In the past decade, the semiconductor industry has become much more back-end loaded as its nature has transformed from enterprise to consumer-driven. I note the extremely poor price action of late, but, for now, will keep it in context rather than presume it is an omen of weaker stock prices ahead.
Disclosure: Long TXN