Morning Comment: Chip Stock Rally Fading

Lots of volatility away from the stock market

The closing numbers on the three major averages disguised some decent activity in the markets yesterday. In fact, if you looked at everything EXCEPT the major stock averages, you would have thought that yesterday was one of the most active days of the year! For instance, despite an extension to the production cuts by OPEC, crude oil got hit hard…as WTI crude oil fell more than 4%. The Treasury market also saw a big move…as yield fell back below 2% and closed at their lowest level of this move (at 1.974%). In the commodity markets, another “flight to safety” asset (gold) experienced a very strong bounce…rallying over $30.

Strange moves between asset classes

It’s certainly not unique to see the Treasury market and gold rally strongly together on the same day. However, we usually see those instances when there is a lot of stress in other markets and/or in the system in general (in a “flight to safety” move)…not when the stock market moves very little (on low volume). It’s also something you would expect to see when oil is RALLYING 4%, not falling 4% (unless crude was crashing…like it was in early 2016).

Of course, maybe both crude oil and interest rates were the ones who were falling in tandem…due to a suddenly perceptible slow-down in the economy. However, you wouldn’t expect gold to rally strongly…and stocks to rally as well…when growth was slowing down……In other words, we’re seeing a big pick-up in volatility in several different markets right now. Maybe this is simply due to “thin” markets during a holiday week, but if it continues for very long, it should have an impact on the stock market. Very simply, experience tells us that when volatility picks up in “other markets”….it tends to spill over into the stock market eventually.

Semiconductors give up most of their Huawei-related gains

We also saw some good sized moves in several groups. It’s no surprise that the utility & real estate stocks reacted strongly to the move in bonds…and the energy stocks fell sharply to the move in crude oil. However, the group that stood out to me was the semiconductors. I realize we’ve been harping on this group a lot lately, but since it’s been such a key leadership group, I'm going to continue to focus on it.

The SMH semiconductor ETF fell more than 1%...and is now down 3.5% from its opening highs on Monday. This means the SMH has given up 75% of those gap-opening gains from Monday morning……..There is still a lot of confusion surrounding the specifics of what the Administration is going to do about the restrictions on Huawei. Peter Navarro said yesterday that the restrictions would be lifted for only a “small amount of low level chips”, but the details remain very fuzzy. Therefore, I’ll be watching the 110.18 level on the SMH. That is where it closed on Friday, so if it moves back below that level over the next week or so, it will have given up everything it gained from the newest Huawei news…which would be quite disappointing.

However, on a technical basis, the more important level will be the 50 DMA for the SMH. A break below that line would also take it below its short-term trend-line from the early June lows, so a move below that line would take a lot of wind out of the sails of the rally for this key leadership group. HOWEVER, if the group can bounce-back…and take-out its intraday highs from Monday morning…it’s going add a decent amount of momentum to this group. Therefore, keeping a close eye on the semis over the next week or two should be very important for the rest of the stock market. (Chart attached below.)

Posted to The Maley Report on Jul 03, 2019 — 7:07 AM
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