Morning Comment: The Battle Lines Are Well Defined For The Chip Stocks

  • Nice rally yesterday…on good volume…but mediocre breadth.
  • Can the rally in crude oil help (and offset the employment data) again?
  • In the future, 2021 earnings expectations will need to be compared to 2019, not 2020.
  • The support/resistance levels for the SMH (a KEY leadership group) are well defined.

Nice rally yesterday…on good volume…but mediocre breadth.

It was great to see the stock market gain ground for the second time this week yesterday. It was also nice to see that the composite volume was higher than Wednesday’s volume. It was not quite as strong as it was during Tuesday’s decline…and the breadth was quite mediocre (just 2 to 1 positive on the S&P 500 and only 1.5 to 1 positive for the NYSE Composite index). Therefore, the “internals” have not improved much this week. However, you have to start somewhere…and to think that these “internals” turn around significantly after the recent scary decline would be too much to ask. In other words, even though the internals were not great yesterday, it’s not a problem yet…as long as they improve in a more meaningful fashion on any “rally days” over the next week or so.

Can the rally in crude oil help (and offset the employment data) again?

The rally came despite an horrendous number in the jobless claims data, so that was positive as well. However, as we highlighted yesterday morning, the expectations are SO low for this week’s employment data (including today’s NFP data)…that we did expect any outsized moves to these reports. We’ll see if that continues today, but the main reason for the bounce in the stock market was the rebound in the crude oil market.

The reports that the Russians and the Saudis were close to an agreement to cut production helped the black gold bounce more than 15%. These reports received from push-back from both parties yesterday, but reports that OPEC+ is pushing for other major oil producers to join in a deep cut in production has oil moving another 5% higher this morning. So it looks like today’s action in the stock market could be determined once again by the oil market.

In the future, 2021 earnings expectations will need to be compared to 2019, not 2020.

On the longer-term side of things, we want to reiterate our stance on the earnings issue that we mentioned earlier this week. We all know that they’re going to stink this year…even if they see some improvement later in the second half. However, we want to push-back a little bit on the argument that says as long as 2021 is good, the market will eventually look past 2020 at some point…and thus the market will be just fine.

The problem is that 2019 earnings growth was zero….and the stock market is now sitting exactly where it stood at the beginning of 2019. Therefore, we’re going to have to compare 2021 earnings forecasts to the 2019 earnings, not the 2020 earnings…and those 2021 numbers are going to have to be better than 2019, NOT JUST better than 2020…in order to justify a meaningful rally from current levels!

Of course, this is an argument for some-time later this year. We won’t know what any realistic 2021 forecasts will be for many months. We also don’t know where the stock market will be once we get those realistic 2021 earnings forecasts. There’s obviously no guarantee that the stock market will be anywhere near its current level in the second half of this year (when 2021 estimates will become realistic). If the stock market falls a lot further between now and the time that we finally get a good idea about where earnings will be in 2021, then looking for a strong rebound in the market will be the right thing to do. However, if the stock market is still sitting at/near current levels in the second half of this year, we’re ONLY going to be able to “look beyond 2020” on the fundamental picture in a bullish manner…if the 2021 estimates look a lot better than the earnings we saw in 2019!……..In other words, we just want to keep the future fundamental picture in the correct perspective right now.

The support/resistance levels for the SMH (a KEY leadership group) are well defined.

Switching gears a bit, we want to talk about another leadership sector in the market we’ll be watching closely in the stock market going forward. In our weekend piece, we highlighted that one key leadership index…the Russell 2000…should continue to be a key leading indicator for the market going forward. Another one is a group we have concentrated on quite a bit over the last few years, but we have not touched-on it over the past week or two…the semiconductors. As we have harped on many times in the past, this group rolled-over well before the rest of the market in 2018…and it led the market throughout much of the rally of 2019. The SMH semiconductor did not roll-over before the rest of the market this time around, but the index remains a very important indicator for the broad market (and the industry remains an important one for the global economy).

The battle lines are clearly drawn for the SMH, so we should have some good measurements in the days and weeks ahead. On the resistance side of things, we have the 200 DMA (of $126). That line provided great support when the SMH saw a pull-back in the spring of last year, so that “old support” level, now becomes “new resistance.” We’d also note that the 126 level is also a 50% retracement of the entire February/March decline…so it’s important on two different levels…..Above that, we have the 50 DMA of 132.60…which is also a Fibonacci 61.8% retracement of the recent big decline. Therefore, we have the odd situation where both the 200 DMA and the 50 DMA both coincide with important Fibonacci retracement levels.

As for the key support level, that comes in just below the 100 level (near 97). That’s the lows from both this March and last May, so any significant move below that level would give the SMH a very important “lower-low.” That would not be good. On top of that, it would also take it below its trend-line going all the way back to the early 2046 lows……Therefore if (repeat, IF), the SMH rolls back over at any time in the 2nd quarter and falls below that 97 level in a material way, it’s going to be quite bearish for the chip stocks.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Apr 03, 2020 — 8:04 AM
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