Stocks and commodities have had a mixed performance this week. US equity indices plus the S&P/TSX were able to eke out a moderate rebound over the last couple of days to cut into their September losses, but overseas indices such as the FTSE, Dax, Nikkei and Hang Seng, were flat to down over the last week. The US Dollar continued to bounce back putting pressure on gold and silver while a wide variety of commodities from the energy, metals, grains and softs groups skidded downward over the last few days. In the absence of significant news events, world markets found themselves stuck in a storm of uncertainty whether economic (especially what a second wave of COVID-19 could mean for demand and whether there may be more lockdowns), or political (UK-EU trade negotiations, US election, US stimulus talks and more). The coming week kicks off the new month and quarter with a flurry of economic announcements headlined by monthly PMI and employment reports. Confession season also gets underway ahead of fall earnings season and it will be interesting to find out if there are many profit warnings either positive or negative considering that so many managements have been vague on guidance in recent months. In this week’s issue of Equity Leaders Weekly, we consider what recent trading activity in the Semiconductor and Materials sectors is telling us about investor sentiment, and the state of the current market correction.
Semiconductors are one of the more prosaic parts of the technology sector compared with software or communications equipment, but are important in that chipmakers can be seen as an indicator of the business demand for tech. Semiconductor producers also are sensitive to changes in US-China trade levels and trade tensions.In early September, the tech sector staged a significant and abrupt correction which drove the NASDAQ Composite down 10% in three trading days. Technology stocks remained choppy through the month, but recent action in the iShares PHLX Semiconductor ETF (SOXX) suggests that the correction has run its course, support has reappeared and that the chip sector may be starting to resume its long-term upward trend. A recent downdraft in SOXX retraced about half of its previous advance before finding support near $285. Since then, SOXX has resumed its primary uptrend as shown by higher lows emerging and confirmed by a recent bullish Double Top breakout. Next potential upside resistance may appear at the previous high near $322, followed by $345 based on a horizontal count. Initial support appears near $291 based on a 3-box reversal. With a bullish SMAX score of 9, SOXX is exhibiting strength against the asset classes.
The US Materials sector includes companies from a number of resource and commodity groups including mining (precious and base metals, plus aggregates/construction materials), forest products, chemicals, industrial gases, and more. Trading action in this sector can provide investors with insight into demand expectations for the traditional industrial/construction economy. The iShares US Basic Materials ETF (IYM) has been trending upward since March but recent weakness suggests investors may be getting more concerned about the health of the global economy and scaling back demand expectations for materials and commodities. IYM turned downward in September, with a series of lower highs emerging and the ETF completing a bearish Double Bottom pattern. So far this appears to be another downward correction within a larger uptrend but a break of $94.50 would complete a larger bearish Spread Double Bottom pattern. Another breakdown would confirm the start of a new downward trend with next potential support near the $90.00 round number and then $86.45 based on a horizontal count. A successful test of $95.00 support would confirm the longer-term uptrend remains intact with potential rebound resistance near $100.00, a round number and recent breakdown point, followed by the previous peak near $105.50.
Disclaimer: SIACharts Inc. specifically represents that it does not give investment advice or advocate the purchase or sale of any security or investment whatsoever. This information has been prepared without regard to any particular investors investment objectives, financial situation, and needs. None of the information contained in this document constitutes an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. As such, advisors and their clients should not act on any recommendation (express or implied) or information in this report without obtaining specific advice in relation to their accounts and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources, believed to be reliable. SIACharts Inc. nor its third party content providers make any representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein and shall not be liable for any errors, inaccuracies or delays in content, or for any actions taken in reliance thereon. Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice.