Rate Talk Wobbles Markets | Semiconductor ETF Changes Trend

Semiconductors are a leading indicator and are widely followed as a proxy for growth. We monitor the group through the ETF symbol SMH mentioned above. We’ve seen several names in the group, and tech names in general, report great earnings and then sell off. ON Semiconductor is a good example of that type of price action that I reviewed in the Open Forum session on Monday afternoon. I’ll review the SMH chart later in this note. 

After a down day from the start, major indexes ended off their worst levels as most put in down days. The S&P 500 found support at the 4125 – 4130 level. There was consolidation for several hours before it ran up into the close as buyers took advantage of the dip. I’m looking at the 4185 area on the index as a minor resistance spot which is the middle of the gap created from yesterday’s opening. A move above that could bring us to the 4200’s again but momentum will be the key component to sustain that type of move. 

The Dow Jones managed to have a small gain on the day. The rotation away from growth was obvious as tech was the worst performer on the day. We saw value hold up much better. Consumer discretionary lagged as AMZN extended its recent pullback. We had retail giving back some reopening gains from Monday. Industrials outperformed with help from machinery. Financials were boosted by banks from positive analyst comments, despite lower rates. Materials (steel, paper/packaging) led the market. Treasuries were mostly unchanged. Dollar was firmer on the major crosses. Gold finished down 0.9% while WTI crude settled up 1.9%.

We had a very busy day on the earnings calendar and while beat rates are at record levels, the new hurdle rates have moved higher and concerns about peak growth linger. Still plenty of worry about supply chain stress and input cost inflation. Factory orders came in at 1.1% with less of an increase in March. Headlines say that 1.3% was expected in March, which seems to be in line with the March Chemical Activity Barometer report which showed a 1.2% increase. 

We continue to see the earnings beat rate remain elevated. Inflation remains the most repeated word in reports and in guidance as companies continue to call out higher raw materials and logistics costs, as a headwind in their future reports. 

I’ll repeat this from last week. 

In some cases, cost passed on to the consumer through inflated pricing can often be confused with an economic boom as was the case in the 1970’s due to the oil price shock. That turned out to be stagflation. But we do not have the recipe for stagflation, since GDP estimates are continuing to be raised, unemployment is lessening, consumer spending is strong while they are financially stable, and lastly, the economic indicators that lead markets are experiencing rapid growth. Inflation is real and it is part of the process of regaining growth that was lost in so many industries due to the pandemic lockdowns worldwide. The initial shock of higher prices may give pause to future purchases while at the same time accelerate current purchases out of the fear of rising prices in the future. Similar to new and existing home sales where there is a fear of rising rates, and taxes in certain states that are experiencing mass exodus’ at the present time. 

S&P futures are up 0.30% in Wednesday morning trading after US equities finished mostly lower in the prior session with growth and momentum under pressure while value and cyclical plays held up better. Asian markets were mixed overnight with China, Japan and South Korea all closed for holidays. European markets are up. Treasuries are slightly weaker across the curve with 10-year yields at roughly 1.60%. Dollar is little changed vs yen and euro. Gold is little changed and WTI crude is up 1.1%. 

Screening for Overbought ETFs: Top Down Process 

This week I look at the ETFs that are overbought: Use this screen criteria: 

  • Stock Rating: Very Bearish and or Bearish
  • Price Level: Overbought
  • Price Level: Below a falling LT trend
  • Money Flow: Weak
  • Relative Strength: Weak

*Your results may vary since you will be running this at a different time than I did.

Again, you’ll see a few healthcare and biotech themes in this screen since they are in the worst performing industries. There are 3 ETFs with a focus on China and typically when you see several ETFs of the same theme a trend is underway. I’ll focus on the Invesco Golden Dragon China ETF symbol PGJ. 

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