When volatility is elevated, as has been the case of late, it’s important to keep an eye on relative strength and weakness. Knowing which sectors and industries are leading the market down or keeping it from falling further can provide important context for when the volatility eventually subsides.
In this case, the way the market has dropped falls in line with recent trends.
The first thing to point out is how tech has been the primary leader downward. Over the five-day period at the end of February in which stocks sold off, technology fell more than 6%, making it the worst-performing sector over the period.
This should not be a surprise. The S&P 500 Information Technology Index has risen at an annual rate of over 13% since 2007, making it the top-performing sector over that time. So it stands to reason that what led us higher will also lead us lower.
Digging a little deeper within the sector, we can see the continuation of a trend that has persisted for the better part of the last two years: that the semiconductors have lagged technology as a whole.
In terms of specific stocks, major semis like Lam Research, Advanced Micro Devices, NXP Semiconductors, Broadcom, and Intel are all underperforming the FANG stocks (only Apple, with its 8% drop, is in the same ballpark as the group).
Some of this can be chalked up to ongoing uncertainty surrounding the COVID-19 virus, which Apple suggested might negatively impact electronic sales in China. This could obviously decrease demand further up the supply chain for its suppliers.
But the more obvious contributing factor here has to do with where the industry is in the market cycle. Chip watchers know that semiconductor sales have been in a secular decline since 2018, and some analysts are predicting the sales decline to get even worse. The fact that a slew of semiconductors reported earnings and revenue for last quarter above analyst expectations has done little to quell concerns.
Ultimately, the industry is at an inflection point. The rollout of 5G should provide some optimism, but the headwinds facing semiconductor companies should continue to dampen enthusiasm for what some have called “the industry of the decade.”
For now, all we can do is watch the tape. The market’s willingness to punish the semis more than broader tech tells us that confidence in the industry is not yet restored. And that’s all we need to know.
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