If There’s a Recession Coming, Why Are Semis Rocking?
Equity markets are likely completing a short-term low after peaking, right on track, during the week of the last FOMC meeting mid-September and that month’s option expiration. I have to admit the downside move this week was more than I expected, but the timing of the low looks right, just as equity indices and bellwether industry groups bottom at support.
Rather than simply highlight a chart of the S&P 500 index, I’d like ensure that readers, particularly those with a bearish outlook, keep an eye on the technical behavior of one of the more important industry groups, semiconductors. Why? Well, if the economy is deteriorating so badly, why are the semis within 3% of their all-time highs. More importantly, why is the relative performance versus the S&P 500 index for this economically sensitive group within 0.35%, yes 0 .35%, of all-time highs?
At first glance, the chart below may look complicated, but let’s break it down to explain the method behind the visual madness. Combining momentum indicators with price and relative performance is a very powerful combination to triangulate a technical view of a security.
The top panel is a simple momentum indicator, tracking the short-term ebb and flow of the SMH Semiconductor ETF. When the indicator moves back to the low end of the range and shows signs of bottoming, as it is now, it is said to be oversold and signals a swing back in the opposite direction is likely developing.
Next, let’s look at how price is behaving around support and resistance levels in the second panel. After rallying back to resistance at the September highs near 123, the SMH pulled back and is beginning to rally from support coinciding with three key technical levels. The first is the 50-day moving average at 116.45 just above the August trading range highs at 115, both of which conveniently line up with 2019 uptrend. Despite all the headline worries, negative economic reports and overall noise, this key barometer for the economy had a shallow pullback and is responding bullishly to its first support level.
Relative performance is leading price to the upside and on the verge of making new highs
Panels 3 and 4 illustrate the relative performance of the SMH versus the S&P 500 and
versus the S&P 500 tech sector, respectively. What’s noteworthy here is that the relative
performance for this highly cyclical group is actually leading price to the upside and is
on the verge of breaking out to all time new highs. I view this positive divergence to be
a bullish technical event for the semis and for the stock market overall.
Bottom line: The old adage of “trade what you see not what your think or hear” is
particularly timely advice given the semis appear to be discounting a more bullish
future than that from headlines and backward looking economic data. New relative
performance highs versus the S&P 500 by the SMH will be an important bullish signal
that I would encourage investors not to ignore.
