Semiconductors have often been a leading indicator for the stock market. Are they giving a bullish signal or is it just a head fake? Let’s explore with the help of a chart.

Please click here for an annotated chart comparing semiconductor ETF SMH to S&P 500 ETF SPY. Please note the following:

• Semiconductors gave several early signals that the stock market was about to drop. Those signals were given when the market was near its highs.

• The chart shows that while the up move in the market has lost some of its momentum from the recent rally, semiconductors have staged a strong rally.

• The trigger for the rally was earnings from Xilinx XLNX, Lam Research LRCX,  Teradyne TER, Texas Instruments TXN and STMicroelectronics STM.

• Earnings from Xilinx were excellent. However, other earnings were not good enough to justify the strong rally in semiconductors.

• According to algorithms at The Arora Report, about one-third of the up move was because of a short squeeze.

• Semiconductors have been very oversold. Oversold sectors tend to rally when the news is not as bad as feared.

• Some of the sharpest rallies take place in a bear market.

• Earnings from Intel INTC were not good.

• The momo (momenturm) crowd is aggressively buying AMD AMD on the belief that if Intel earnings were not good, AMD must be taking market share. However, the hard data do not support that argument.

• Western Digital WDC,  threw a bone to investors, claiming the second half of 2019 will show growth. Western Digital offered no material data to support the contention.

• The data we have gathered at The Arora Report show that the channel is still stuffed and there is excess inventory with key customers, demand is not strong and supply is higher than the demand. Those are not great fundamentals for the semiconductor sector at this time. The long-term fundamentals for semiconductors are good.

• Apple AAPL is a big buyer of semiconductors. Apple has already shown that the demand for smartphones is weak….Read more at MarketWatch.

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