Wednesday, April 13, 2022
One of the most prominent economic stories of the past year has been the supply shortage of semiconductors. As COVID-19 shut down chip making facilities across the globe, and consumers shifted their consumption from services to goods, the resulting combination created an unprecedented shortage of semiconductors that has affected everything from the automobile market to supply chains for refrigerator parts. And a reasonable person might think that this dynamic could create a highly profitable environment semiconductor companies. While that may or may not be true, when we study the supply-demand dynamics of semiconductor equities using technical analysis, we are seeing an overall lack of demand for a group that has been a market darling for much of the past decade.
As shown in the LPL Financial Chart of the Day, the PHLX Semiconductor Index broke down the 52-week relative lows vs. the S&P 500 this week, a characteristic we would typically associate with groups expected to underperform over the intermediate-term. The absolute chart (top panel) isn’t much better as the group is currently testing its mid-March lows after failing to eclipse resistance during its most recent rally.
“Nobody would argue that semiconductors aren’t an attractive fundamental story, and that chips are increasingly part of every aspect of our lives,” said LPL Financial Technical Market Strategist Scott Brown. “However, investors need to recognize that these fundamentals are well known and price is simply suggesting that there are more sellers than buyers for these stocks right now”.
Sell-side analyst ratings on the underlying equities also suggest that this group is still overly loved despite recent underperformance. The ratio of buys to sells on the underlying holdings of the PHLX Semiconductor Index is an astounding 20:1, more than double the ratio for the broader S&P 500. From a contrarian standpoint, this suggests that optimism may simply have become too widespread after years of outperformance and may be in need of a correction itself.
We believe a move below the March lows could be the catalyst for that sentiment correction, and would caution that it remains an elevated possibility in the near-term. While the index is now more than 20% off its late-December highs, corrections of larger magnitudes were regular occurrences prior to the past decade’s streak of consistent outperformance. At the very least, the relative chart suggests this isn’t an area we would focus on for alpha as we enter into the historically tougher summer months.
LPL Research’s Strategic and Tactical Asset Allocation Committee continues to recommend near-benchmark levels of exposure for the broader tech sector. Despite technical headwinds, the fundamental story suggests that the next move is more likely to be an upgrade than a downgrade and recent weakness has left valuations more reasonable. From a technical standpoint, semiconductor weakness may continue to act as a drag on the group, and we would focus on stronger technical trends within the sector, such as in technology hardware, as we wait for a better opportunity in the sector overall.
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