Semi sector flashes a moderate warning

The Semiconductor sector has an internal warning…

As if the economic cycle and thus the stock market did not have enough internal problems (e.g. the CESI divergence to the S&P 500) a cyclical leader, the Semiconductor sector, is suspect as the front end of the market leadership chain (SOX>NDX>SPX), and in its own sector internals.

As a reminder, the play coming out of the acute pandemic period has been a global Semiconductor shortage that has made headlines far and wide as it squeezes the Auto industry and others due to chip supply constraints. The solution to the problem has been more Semiconductor Equipment, like that manufactured by Lam Research (LRCX) and Applied Materials (AMAT).

The logic was that of course the Equipment stocks would lead the Semi sector as demand for their products is directly in response to supply problems (more equipment, more chips… duh). But the ratios of these Equipment makers to the broad Semi sector (full of chip makers, both fab and fabless) continue to roll over in a negative cyclical sign for the economy.

Just a pullback or something more? These are daily charts, so the end of the world is not yet indicated as a major uptrend remains in place in the ratios. Also, consider that premier global Equipment maker ASML is flying around at new highs. Another positive caveat is that this is occurring in tandem with our ‘summer cool down’ plan. So it could be at least partially a manifestation of that.

But insofar as a daily chart is rolling over and has not yet stopped rolling over, it is something to watch and be aware of.

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