The S&P Semiconductors Select Industry Index is experiencing a significant downturn, and this could spell trouble for the overall stock market.
Breaking the Trend
Both in terms of price and relative strength, the index has reached its peak. What’s more concerning is that it has now broken the uptrend that started from its low in October.
An Important Indicator
Unlike broader stock market indexes, the S&P Semiconductors index is equal-weighted. Despite recovering only half of its decline from the 2000 top, its relative strength holds substantial importance as a leading indicator for the stock market. The fact that it has failed to breach resistance suggests that broader stock indexes will be facing a pullback in the coming weeks.
Key Chart Patterns
A closer look at the weekly chart of the Semiconductors Index reveals several bearish reversals, marked by red arrows. These reversals occurred when the advances reached their peak, coinciding with the Index testing and piercing its 11-week moving average. One such reversal happened in early August when the index attempted to rally back above the barrier but was repelled. This event decisively severed the uptrend that had been established since the previous October low.
Weakening Relative Strength
Further emphasizing this negative trend is the weakening relative strength of the group against the S&P 500 Equal Weight Index. The semiconductors have formed a rounding top pattern at a 23-year resistance level. While many other indexes surpassed their 2000 peaks by healthy margins, the semiconductors’ relative strength only managed to recover half of its decline from the 2000 peak.
Time to Sell
In light of these developments, I strongly advise my clients to sell and secure profits in semiconductor stocks and other technology holdings.