Are Semiconductors Looking Like It's The Year 2000?
1.) SEMICONDUCTORS - There’s something happening in semiconductor stocks right now that reminds me an awful lot of what we saw back in 2000. Now, before anybody gets carried away, I’m not suggesting we’re about to see another dot-com crash. In fact, I think the odds favor the exact opposite outcome. Human behavior doesn’t change very much, even though companies, technology, etc. do. So that gives us some perspective. The semiconductor sector, which you can track with symbol SMH, has held the leadership position for most of this bull market. The whole AI infra trade thing. The rally from Oct 2023 to about now, looks just like it did from 1998 to the top in 2000. You can see what that looked like below. Even though I'm not showing you a picture of today...trust me when I say it looks exactly like 1998 - 2000. That little triangle pattern you see tends to break higher. It's just a consolidation pattern within a bull run. Except back in 2000, it didn't! So if these two time periods look the same...how's this likely to play out now? I still expect semiconductor stocks to move higher, but the comparison gives us a reason to watch this group closely. And just yesterday, one of our internal indicators flashed a "buy" signal within an oversold condition for SMH. That doesn't guarantee an immediate move higher. But the odds are tilting in favor of the bulls. The bottom line is that these chips power the products and businesses that investors are so excited about. The semi group (SMH) is down -4.4% in the last 3 months. So far, that's still just consolidation.
2.) HOUSING - Interest rates are too high. Houses are too expensive. Nobody can afford anything. The consumer is getting crushed, and apparently the bond market is about to collapse and take the rest of the economy down with it. Blah, blah, blah...ya...we get it. A couple of weeks ago I showed you the Economist cover that said "Will Bonds Blow Up?" Since that magazine showed up, Treasury bonds have been moving higher most every day. Funny how that works. I'm not saying that a long term bottom in bonds is here. That's not the point...I don't know if a bottom is here or not...even though there are certainly improving signals in that market. But I do know that when everybody seems convinced something terrible is about to happen, I start getting interested in what happens if they’re wrong. That takes me to housing. What if the next big move in housing isn’t a collapse? What if it’s a boom? I know. Ridiculous, right? Sure, based on the data right now there appears to be more sellers than buyers, but I don't really care. I'm not a housing expert. But Home Depot is. Home Depot is one of the most important companies in the stock market when we’re trying to figure out what’s happening with the American consumer and the housing industry. When people are buying homes, renovating kitchens, building decks, or fixing up their properties, Home Depot is often getting a piece of that spending. When people start cutting back, the company can feel that, too. Lately, Home Depot has been trash, down -5.5% in the last 3 months and -8.25% year to date. But now it is starting to be interesting. Home Depot is now trading right around the same price where buyers have repeatedly stepped in over the last five years. See that little green circle on the left side of the chart? That’s where Home Depot originally broke out after the COVID crash and started moving higher again. That old breakout area eventually became the same place where the stock kept finding support years later. And now we’re back there again. I have no idea if buyers will show up here again. But if there was ever a perfectly logical place for this stock to stop falling and start moving higher, this would certainly be it. We’ve had major stock market averages making new highs while companies tied to home construction, renovation, and the consumer have been struggling underneath the surface. That’s not necessarily a bad thing. Different parts of the market take turns leading and lagging all the time. But imagine what happens if some of these laggards start turning around. This is worth watching, because if it fails, that'll be an important signal too! It would not be good for the bulls, if one of the most important consumer and housing-related companies in America starts breaking down from a massive five-year consolidation.
3.) OIL - People are concerned about energy costs as we head into winter. That's a fair concern. But based on the way oil - WTI Crude - is trading, I just don't think it rages too much higher. Oil has been trading below a longer term trend ever since it topped at the start of the Iran war. Could we test that red line again? Sure! But reports are that more oil is actually moving through the gulf than before the war. Kpler's numbers for the week through Oct. 18 show that 24 million barrels a day are coming out of the region against 23.3 million prewar, and Hormuz itself is back to 82% of normal even though October has seen roughly 30 ship attacks, a fifth of the war's total. Saudi and Emirati pipelines now carry 40% of the Gulf's non-Iranian crude around the strait, up from 17% in February. Could things be improving?
