The canary is the semiconductor equipment sector. You will recall my associate who does business in the semiconductor equipment industry not a month ago informed me that the sector was “dead as a doornail”. These are the companies like Applied Materials, Lam Research, Brooks automation, MSK Instruments, etc. that make the high cost capital equipment used in chip and IC manufacturing.
This morning’s update from my contact who is a precision machining supplier to the semi equipment sector:
He notes “a definite increase in the Semi business. I think right now we are as busy as we [can] handle. For how long, I’m not sure but the signs are that it is going to continue.”
Now, one update from the volatile semi equipment sector does not necessarily change much on the big picture. The US economy is on a secular economic contraction that is being fought by inflationary policy. But we must note that the semi’s are very sensitive and while volatile (they could fall flat again within months) they put some weight to the economic growth story in the short term and by extension, the potential for inflationary
2012 2013 (i2k13) to finally arrive.
Given this information on an early mover sector, how do we proceed? Well first, we realize that the stock market is over bought, over loved and in need of a healthy correction. Will that come? Well, they always do sooner or later. Here is a view of the SOX, which includes semi companies of all kinds, not just the equipment stocks.
The daily chart of the SOX is not yet absurdly over bought, but can correct at any time. The first line of support is noted. The pattern targets 430 to 440. It would be healthiest for this to be done after a test of the breakout or the SOX would be severely over bought at target.
I have taken the liberty of painting the weekly MACD green even though the red line is still a hair negative. If there is a great economic revival going on to be led by the semi’s, the chart does not yet know it. A breakout however, comes just above at 425.
More than an investment objective, the semi’s are for our purposes an indicator. Right now, the indication is that inflationary policy has managed to start coming into the economy, potentially as it did in 2009. Note that the weekly SOX above bottomed in Q4 of 2008 (just like the precious metals and certain global markets) while the broad US market bottomed in March, 2009 as they finally got the financial sector under control.
The precious metals rose strongly with the likes of the SOX and a host of other things positively correlated to the (inflated) economy. But today things are different as we know. There is the potential for continued delay in a precious metals recovery. At the very least, the precious metals will not be the only game in town as long as inflationary economic stimulus is having the desired effect of raising most asset prices.
Is this part of what is being priced into the gold stocks? I have to ask the question because we must never go on auto-think, blaming nefarious forces of events. That is not the way to invest. In NFTRH 223 we looked at some rational possibilities having to do with momentum players and sentiment in a risk ‘ON’ environment. What if just maybe there is a component of ‘gold stocks do not favor an inflationary expansion phase’ in there as well? Because as I have tried to point out repeatedly, gold mining fundamentals will degrade during such times.
Now, this backward sector usually goes against its own fundamentals. If the miners do bottom and if an inflation-fueled economic expansion persists, then the gold stocks are a ‘sell’ into such a rise at a point to be determined mostly by TA and sentiment at the appropriate time.
I often point out that NFTRH should not be considered a precious metals letter because I am only positive of the PM’s in the big picture because I am negative on the economy’s long-term fundamentals. This does not change just because the semi’s are popping and an inflationary phase may finally be coming on line in the form of our
i2k12 i2k13 buzz word.
But if the money supply continues to rise and the likes of the semi’s continue to flash expansion (however brief), the focus must more aggressively spread out within the sphere of commodities and stocks, both global and domestic.
Meanwhile, #223’s premise has not changed. The market needs a breather and we are managing a continued potential bottom in the gold sector. Just use this update as additional food for thought. There will be more to come.