Watching the Dip in Chips

As we march into year-end — historically one of the strongest stretches of the calendar — the market continues to chop sideways.
 
Breadth has been deteriorating beneath the surface since the summer, and that weakness is finally bleeding through to the leaders.

Technology led off the April lows, doing the heavy lifting, while most other sectors lagged the market. 

Now, that gap is narrowing— and instead of the laggards catching up, tech looks to be catching down.

Seven of eleven S&P sectors are already below their 50-day moving averages, and Tech looks next in line.

There’s also been a notable bifurcation within the tech sector, as the two largest and most important groups couldn’t look any different.

While semis have been a powerhouse industry, up over 100% since bottoming in Q2; software has struggled, closing today at fresh two-month lows.

For a while, it seemed like software playing catch-up was the higher probability outcome… but the opposite has been unfolding since last week.

Software rolled over first, and now semiconductors are threatening to follow.

This is how corrections start — catch-up moves fail, offensive rotations start to dry up, and the leaders begin to follow the laggards lower instead of pulling them higher.

If semis can’t hold the line, it means the broader market’s most important engine of relative strength is giving in.

For me, it’s simple. This can’t be a top in the Equal-Weight Semiconductor ETF $XSD.

If it is, and we violate 315, then we’re looking at another 10% of downside to VWAP support. The market and major averages are sure to experience further selling pressure if this scenario plays out.

On the other hand, semis could dig in and reverse at this critical level. If that kind of action plays out over the coming sessions, it’s probably because the broader market is establishing a tradable low.

I think semis are that important to the bull market. 

After all, you can’t have a party without the chips!

Be sure to join me and JC for our Breakout Multiplier live event tomorrow. We’re going to talk about how we navigate these messy markets and some of the uncorrelated trades that we’re leaning on for long exposure right now.

Steve