Andrew’s Analysis: Semiconductor Stocks

Andrew’s Analysis: Semiconductor Stocks

over 3 years ago2 mins

Mentioned in story

The recent rally in semiconductor stocks has been anything but half-baked, offering a strong signal that the broader stock market will continue to climb higher even as US authorities dither over implementing further economic stimulus measures.

What does this mean?

While the headline gains or losses in stock markets get the most investor attention, churning moves below the surface can often be more interesting and insightful. And this year’s 32% climb in the Philadelphia Semiconductor Index (tracked by a well known exchange-traded fund with the ticker SOX) shows that investors are keen to pick up companies trading in the building blocks of the modern economy: computer chips.

The gains have pushed the semiconductor index to 20-year high relative to the wider S&P 500. Investors’ willingness to bet on continuing good times for such economic bellwethers suggests that the bull market that began in March still has some distance left to run.

(Source: Bloomberg)
(Source: Bloomberg)

Why should I care?

Investors have tracked the relative performance of different sectors of the stock market for clues on the health of investor sentiment and the underlying economy since at least the late 19th century.

Back then, of course, there were no semiconductors. But one of the most widely followed techniques – known as Dow Theory after Charles Dow, co-founder of Dow Jones & Co. – compared the performance of shares in industrial companies with shares in railway companies, who would be shipping the goods the industrials produced.

The practice of comparing transport stocks with industrial stocks continues to the present day. And the relative movements of the Dow Jones Transportation Average (in red below) and the Dow Jones Industrial Average (in black) paint another optimistic picture for the stock market.

(Source: Koyfin)
(Source: Koyfin)

The Transportation Average set a new record high last week, sending Dow Theory proponents into a fever – although they won’t get really excited until the Industrial Average manages to break above the high it set in February (shown by the horizontal blue line).

So keep an eye on that key 29,551 level for the Dow Jones Industrial Average – barely 3% above last week’s close 👀

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