Special Report: Emerging Tactical Breakout In Semiconductors?

Conclusion, Investment Implications, Strategy

The market-leading PHLX Semiconductor (SOX) index is flirting with a Tactical breakout higher today that, IF CONFIRMED, would suggest that the US stock market’s November advance is resuming.

Introduction

Since mid February, we have seen market-leading Technology and Semiconductor stocks underperforming the benchmark S&P 500 (SPX) while defensive blue chip stocks have coincidentally outperformed.  About a month later, we also saw small cap stocks — another market leader — underperforming SPX.  Even though SPX has managed to remain just above Tactical support during this entire period, based on the broad market index’s March 2020 uptrend line and 50-day moving average, this defensive rotation has thrown a wet blanket on the larger broad market advance that began back in November. 

However, we are watching an emerging breakout today in the PHLX Semiconductor (SOX) Index that suggests the November overall market advance may be resuming.

Semis Breaking Out From 6 Weeks Of Indecision

Chart 1 below plots the SOX Index daily since Q4 2020 along with its 200-day moving average (major trend proxy, orange line) and March 2020 uptrend line (green dashed line).  Semiconductors typically lead Technology both higher and lower.  Moreover, SOX has maintained a statistically significant and stable positive linear correlation with the NASDAQ Composite (COMP) Index throughout the past 25 years, most recently an essentially lockstep 0.98 over the past 6 months.

Chart 1

The chart shows that SOX’s March 2020 trend line was tested and held on Mar 8th.  The blue highlights show that the index’s sideways, coiling price activity since then has formed a well-defined period of investor indecision on the chart.

The green highlights show that SOX has gapped above this indecision area thus far today which suggests an emerging breakout higher.  A sustained rise above the upper boundary of this pattern, currently at 3057, would confirm this and target an additional 11% rise to 3450 — which would be new all-time highs.  And, per the correlation, a bullish Tactical breakout higher in SOX would likely coincide with a similar breakout and directional move in COMP and in the overall Technology Sector.

However, we also caution that it is currently 10:30 am Chicago time, and there are many hours to go between now and the close.  Managers/investors may also consider that the US market has recently become notorious for broad, directionless intraday moves that are often completely reversed by the close, or the very next day.  Thus, the purpose of this Special Report is not to confirm a bullish Tactical reversal, but only to highlight one particular part of the market that we are watching as a potential leading indicator of the overall market’s next significant directional move.

One ETF that tracks the SOX Index is the iShares PHLX Semiconductor ETF (SOXX).