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Lean Against Semiconductors' Leadership

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Either take profits on long positions or sell short the group.

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Summary of Yesterday's Notable Technical Developments

Stocks put in a "doji" candle Friday which indicates pause or indecision. Occurring near 2009 highs and following a "bearish engulfing" candle on Thursday, we have to initially view the doji as bearish. We need more evidence, however, to become fully bearish in the short-term.

Bonds got slammed hard Friday on the news of lower-than-expected job losses. 10-year Treasury yields jumped above near-term resistance at 3.4%. The magnitude of the sell-off in bonds (and rise in rates) was one of the main culprits for stocks giving up almost all of their gains after the initial morning rally.

Commodities
were also very weak Friday in reaction to the jump in rates and in the US dollar. The sell-off was particularly violent in gold futures as it finished lower by more than 4%.

The U.S. Dollar Index was up in the morning, hit some resistance right at the downtrend line, but then blew through it with ease as the day progressed. With the dollar's downtrend broken, the question is whether we'll see a rapid ascent or will it form more of a base first?

Critical Market Components:


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Market Internals:



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Chart of the Day: Philadelphia Semiconductor Index



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  • After lagging the market badly, the Philadelphia Semiconductor Index has done a good job of catching up with the broader market. Now, however, the SOX sits at a critical make-or-break juncture.
  • Based on our Elliott Wave work, the SOX completed an ABC correction off of the lows set in November 2008. Semiconductors put in there bottom well in advance of the overall market's bottom in March. The group has clearly displayed leadership for the broader market in terms of both direction and timing.
  • Our view that the SOX finished up an ABC correction coincides with our view that the broader equity market is also in the process of topping out in the short-term and that a new down leg in stocks may be soon upon us.

  • We'll know we're wrong on this call if the semiconductor index manages to close above 337.16. Until then, we're of the view that the low-risk trade in semiconductors is on the short side.

Strategy: We would look to be leaning against the semiconductor sector here either by taking profits on long positions or by selling short the group; any short sales should be exited on a daily close above $337.16. New longs shouldn't be initiated unless and until the SOX trades down to the $300 to $305 area (and only trading longs should be initiated then).
No positions in stocks mentioned.

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