The S&P Semiconductors Select Industry Index is often a leading indicator for the stock market.
Nathan Laine/Bloomberg
The S&P Semiconductors Select Industry Index is rolling over—and that’s bad news for the broader stock market.
The index has topped both price-wise and on a relative basis. And now it has broken the uptrend from its October low.
S&P Semiconductors is an equal-weighted index. Unlike the broad stock market indexes, its relative strength has recovered just half of the decline from its 2000 top. Because the index is often a leading indicator for the stock market, its inability to breach resistance indicates that the broad stock indexes will be pulling back in the coming weeks.
Below is a weekly chart of the Semiconductors Index. Notice the bearish reversals (marked by red arrows) that formed when the advances peaked. Each reversal occurred just as the Index was testing and piercing its 11-week moving average, most recently in early August, when the index was repelled as it attempted to rally back above that barrier. The uptrend from the previous October low would go on to be severed decisively.
The chart below illustrates the weakening relative strength of the group. Against the
S&P 500 Equal Weight Index,
the semiconductors have formed a rounding top at a 23-year resistance. And while many indexes exceeded their 2000 peaks by healthy margins, the semiconductors’ relative strength recovered just half of its decline from its 2000 peak.
I continue to advise clients to sell and take profits in semiconductor stocks and, indeed, most of their technology holdings.
Andrew Addison is the author of The Institutional View, a research service that focuses on technical analysis.
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