By The recent performance of the S&P Semiconductors Select Industry Index is cause for concern, as it could spell trouble for the broader stock market.
Breaking the Uptrend
Both in terms of price and relative strength, the index has shown signs of weakness. In fact, it has now broken the uptrend that had been in place since its low point in October.
A Leading Indicator
Unlike other stock market indexes, the S&P Semiconductors index is equal-weighted. Its relative strength has only managed to recover half of the decline it experienced after reaching its peak in 2000. Since this index often acts as a leading indicator for the overall stock market, its inability to breach resistance suggests that we can expect a pullback in the coming weeks for the broader indexes.
Bearish Reversals and Resistance
By examining the weekly chart of the Semiconductors Index (see chart below), we can observe several bearish reversals (indicated by red arrows) that occurred when advances peaked. These reversals consistently took place as the index tested and pierced its 11-week moving average. In August, for example, the index attempted to rally above this barrier but was repelled. This ultimately led to a decisive severing of the uptrend that had been established since the previous October low.
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Weakening Relative Strength
The relative strength of the semiconductors group is also showing signs of weakness when compared to the S&P 500 Equal Weight Index. After reaching a 23-year resistance level, a rounding top pattern has formed for the semiconductors. While many indexes have surpassed their 2000 peaks by significant margins, the semiconductors’ relative strength has only managed to recover half of its decline from its 2000 peak.
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Take Profit and Sell Recommendations
In light of these developments, I strongly advise clients to consider selling and taking profits in semiconductor stocks, as well as most of their technology holdings.
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