After a very mild dip in mid-June, the stock market has rallied about 4%-5% over the last month. (+4% on the Nasdaq and +5% on the S&P 500.) However, it has not been a great couple of weeks for a number of other areas in the marketplace. As we highlighted yesterday (and several times in the last week), the Russell 2000 has been stuck in a sideways range for five months now…and it has actually declined in the last month. It has also been a rough week for Bitcoin…as the cryptocurrency has dropped 20% since mid-June (and Ethereum has given back 24%). The meme stocks have also taken it on the chin. Gamestop (GME) and AMC have both declined more than 44% (and both look lower this morning).
In other words, some of the highflyers from earlier this year have lost a lot of momentum. Thankfully, the tech stocks have regained some serious upside momentum, so the market continues to hold in there quite nicely. It will be interesting to see if this continues. We’ve been harping on the semiconductor group for a long time now and it looks like the next several days will be important for this key leadership group. If you’ll remember, we highlighted how the chip stocks had not been able to make a new high even though the broad tech sector has made a meaningful new high. To be more specific, the SMH semiconductor ETF has been bumping up against its 2021 highs from February and April…even though the broad XLK technology ETF has been able to break above its April highs by almost 7%!
Earlier this week, it looked like the SMH was finally going to breakout. Taiwan Semiconductor (TSM) rallied nicely on Tuesday and since it has the largest weighting in the SMH, it seemed like it was going to be the catalyst for a breakout in the entire group. However, as we looked at the rest of the 25 stocks in the SMH that afternoon, we noticed that only two other stocks besides TSM were in positive territory. The other problem was that those other two stocks were only up by 5-10 cents…while most of the stocks that were down were falling in a material way. In other words, TSM was the only thing holding up the group on Tuesday.
This morning, TSM is down 3% in pre-market trading after the reported their earnings and stated that their margins were lower than expected. This 3% decline is not a disaster. The move will merely take it back into the tight range it had been trading in for most of June. However, we also have Nvidia (NVDA) is coming off an extremely overbought condition…and will still need to fall further before it works-off this condition. Also, it has seen a negative cross on its MACD chart…and the stock has fallen in a material way after other negative crosses in the last year. (NVDA is a GREAT company, but that doesn’t mean its stock cannot see corrections from time to time. In fact, the stock has seen FOUR corrections during its 320% rally since the March 2020 lows…with two of those took place within the past five months.)
TSM and NVDA make up 25% of the SMH, so if both of these stocks start to decline in unison, it’s going to make it very tough for the SMH to breakout in a significant fashion any time soon. Given that the semis have been a key leadership group for the tech sector over the years, it could be tough for this sector to rally further in a meaningful way over the coming weeks.
Speaking of highflyers, the ARK Innovation ETF (ARKK) is seeing some renewed weakness. It is down about 10% so far this month and has broken back below its 200-DMA. ARKK tried to break above its highs from March and April last month, but that turned out to be a “head fake.” (In fact, it got right up to trend-line from March 2020 and then rolled over.) The decline it has seen this month is not a disaster, but it has been enough to give the ETF a negative cross on its MACD chart. That said, as you can see from the attached chart, negative MACD crosses have been followed by significant declines in the last year. Therefore, it looks like this former highflyer will see some more weakness before it can regain its footing once again.
Of course, none of these issues have had a negative impact on the broad market, so the stock market could continue to rally. However, it looks like investors and traders will have to look beyond the usual suspects in order to find the next highflyer.
Matthew J. Maley
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.