Sox Turning Lower

Sox Turning Lower

The market-leading and highly cyclical semiconductor sector is turning lower after making a higher high on declining relative strength and momentum. These negative divergences are showing up all over the place on the charts I monitor. Confirming this potential change in trend, data and information service provider IHS Markit this week also lowered its global revenue growth outlook for the chip industry in 2019 to a decline of -7% year/year.

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Can the Chips Hold the Break Out?

Can the Chips Hold the Break Out?

The Semiconductor industry is highly cyclical. Companies in the sector face huge swings in demand for their products in tandem with peaks and troughs in the broader economic cycle. From the depths of the bear market lows of 2009, the SOX Index, which comprises 30 semiconductor chip manufacturers, has rallied an incredible +840%. 2018 provided the first real test for holders of the chip stocks. The SOX Index peaked in March 2018 and then corrected -27% by December. The risk-on rally that followed in early 2019 has seen the chip-makers explode higher, rallying +48% in four short months.

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Chips Ahoy!

Chips Ahoy!

Semiconductor manufacturers are one of the more volatile sectors of the technology industry given the capital intensive, high fixed cost nature of their business. Semiconductor stocks are also very cyclical given that chips can be found in every industry and every country around the world. So, the chip stocks are a great barometer of the overall health of the economy and tend to lead the market up and down, similar to the banking stocks. Like the financials, the semiconductors peaked in early 2018 and have been making lower highs and lower lows in the intervening months.

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Moore's Law

Moore's Law

George Moore, co-founder of Intel and Fairchild Semiconductor, published a paper in 1965 (and updated his forecast a decade later) observing the fact that the number of transistors on an integrated circuit would double approximately every two years. His forecast remarkably held true until 2012 but the pace of exponential growth has slowed in recent years. Nonetheless, Moore was prescient in his observations and benefitted handsomely from his 'Law'.

Today, the semiconductor industry remains on the cutting edge of innovation in the technology sector. Yet, the industry is also highly cyclical as semiconductor companies face huge swings in demand for their products in line with peaks and troughs in the broader economic cycle. After a sharp -26% correction 2015, the SOX Index has surged back to life and has added +165% in just the last two years.

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