We have been tracking the loss of leadership by the Semi sector, at the front end of the SOX > NDX > SPX leadership chain since the cyclical indicator’s top last summer. Now in what I believe is a late-stage bull cycle, the market is rotating its sectors as it tries to find candidates to pump (like the Cloud/SaaS segment I/we have been focusing on of late) and depending on the USD, other areas that may gain bids, like Energy, Metals, EM, Asia, etc.
But I also added AMD a few days ago because (per the trade log):
But what if there is more to the picture than just a Triangle? What if the entire sector (and its rotten looking potential H&S pattern) is actually early on in a pivot back to bullish, soon for forecast and lead the next post-recessionary economic cycle? Note: I believe we are already in recession.
SOX could merely be bouncing to fill the first gap. But it could also want the upper gap from the Head of the pattern. That would negate the pattern from viability. From NFTRH 838:
The bearish chart of the Semiconductor index looks almost too obvious. Indeed, a gentleman I met at Thanksgiving mentioned it. So he, I, you and legions of chart gazers the world over see the Head & Shoulders pattern. That’s an argument that it won’t play out. However, “play out” in this case means crack the neckline and tank to the measured target of 2645. But what looks more doable is a drop to the neckline which, even if it holds, is still 13% below the current level.
If it rises above the 50 day average, even the prospect of a neckline test would be in question.
Moving on, let’s look at some Semi sector research, courtesy of Semi.org and Sungho Yoon.
Silicon Wafer Market Outlook – A Dynamic Between Equipment Investment and DRAM Pricing
From the article, note that troughs and upturns in Fab Spending (Semi Equipment like AMAT, ASML, LRCX, etc.) lead new cycles in wafer shipments. It’s logical and is the way we’ve managed the Semi sector since January, 2013 when we used the now-defunct Semi Equipment book-to-bill ratio to gauge a new and positive economic cycle (a final nail in the counter-cyclical gold sector’s coffin, among other things).
Folks, “IF” that green Equipment growth rate is actually turning up from a trough, you don’t want to have a counter-cyclical view. Which also means you don’t want to have a positive gold mining fundamental view (at least if the 2013 macro analog holds) and you don’t want to have a broad bearish view.
But if we are indeed in recession now, the Semi upturn (if it continues to develop) could act as a bullish internal indication for us even as the broad markets top out in the shorter-term, as expected. I would absolutely love to see a day – perhaps in H1, 2025, when everybody thinks the worst, and yet we see a bull opportunity like what is described above.
However, caution is also advised when DRAM prices peak and start to decline.
The historical data in Figure 2 shows that when DRAM ASP growth rates peak and then decline, wafer shipment growth tends to slow down after a lag.
There is no sign of a peak and roll-over yet. But…
In conclusion, the sustained recovery of the silicon wafer market hinges on a combination of increasing semiconductor equipment investments, the stabilization of raw material inventory levels among chipmakers, and careful monitoring of DRAM pricing trends. While the current upward trend in equipment investments is a positive driver for wafer shipments, the potential deceleration of DRAM Blended ASP growth poses a significant downside risk. If DRAM pricing exerts a sustained negative influence, it could shorten both the amplitude and duration of the current wafer market upcycle more than anticipated.
Bottom Line
Given that there is no sign yet of a roll-over in DRAM pricing and there is a slight upturn in Semi Equipment, I think that at the least Semi can participate in the bull market in the very short-term. At best, it could also cycle into a new economic bull phase later on. But I think that is much less likely any time soon if/as inflationary effects continue to ease (which would likely roll DRAM pricing over).
But it does open up narratives for 2025 for a cyclical leader. I don’t want to over hype this at the moment. But Semi, as usual, will bear watching for us in our weekly analysis. It could help guide as to when to turn bearish on gold stocks, when to be bullish on broad stocks and/or other implications we’ll track along the way. For now, there is a duality in the Semi sector of positive and negative inputs. But the author expresses caution even though one of the inputs (DRAM pricing) has not yet rolled over.
Hence, there are elements in play that could see Semi re-participate insofar as the late-stage market rally continues.
