Chip Crunch: Tech Leads Stocks Lower

Chip Crunch: Tech Leads Stocks Lower
Greg Guenthner coming to you from Baltimore, MD...

The market looks downright ugly.

Yesterday’s bounce attempt fizzled shortly after lunch as the major averages sunk deep into the red. The Dow Jones Industrial Average coughed up more than 160 points and closed the day at its lows.

But the real carnage is happening in tech stocks this week. The Nasdaq Composite led the averages lower on Wednesday, dropping by more than 1.5%.

The media continues to blame the weakness on a combination of China trade jitters and a rising dollar. Whatever the root cause, this was the second time this week where tech stocks took a beating.

Semiconductors are leading the retreat. Over the past three weeks, the VanEck Vectors Semiconductor ETF (NYSE:SMH) has gone from knocking on the door to new all-time highs to diving below its 200-day moving average as of yesterday’s close. The ETF is lower by nearly 9% since June 6.



We’ve also witnessed recent failed breakouts in flagship chipmakers such as Intel Corp. (NASDAQ:INTC), Micron Technology (NASDAQ:MU), and NVIDIA Corp. (NASDAQ:NVDA), Investor’s Business Daily notes.

These leaders are quickly morphing into laggards as we approach the close of the second quarter. While the Nasdaq Composite is clinging to a small gain over the past four weeks, the semiconductors have dropped deep into the red.

Pullbacks like this one can offer alert traders a tremendous opportunity while everyone else is running for cover. That was the case during the first quarter as semiconductors and other tech stocks first started to find their footing following the market correction. When the averages corrected more than 10% from their all-time highs back in the winter, we peeled back the market’s layers to uncover clues that led us to some surprisingly strong trades.

Tech stocks were the first to separate from the pack in early February. But the FANGs and other household names weren’t the only tech darlings ricocheting higher to lead the market higher.

The semis busted out of their collective funk to turn positive on the year by the second week of January — even as the S&P 500 was still trying to find its footing. That’s when we dove back into the market to take a swing at the VanEck Vectors Semiconductor ETF.

My rationale was simple: If the bounce sticks, the semis had a great shot at leading the next leg of the rally higher. And even if the market remained choppy and volatile, SMH still had a decent shot at outperforming the averages.

While we enjoyed a quick run to new highs in March, the semis have since turned into a choppy mess. Now that these stocks are beginning to consistently underperform their tech peers, it’s time to cut the trade loose and wait for the market to reveal better opportunities.

I know it’s tempting to try and grab tech stocks on the “cheap” right now. But I don’t think that’s the right move for us to make. Let’s give the tech sector some time to settle down before we start thinking about what we want to buy. Frantically bottom-picking tumbling stocks could leave us stuck with some nasty losses in a tough market…

Sincerely,

Greg Guenthner

www.fotavgeia.blogspot.com