SOX RALLY IS CONTRIBUTING TO GLOBAL LEADERSHIP IN ASIA -- SOUTH KOREA AND TAIWAN ETFS ARE LEADING GLOBAL RALLY -- TAIWAN SEMICONDUCTOR IS BOTTOMING

TAIWAN AND SOUTH KOREA HAVE STRONG CHIP LINKS... Last Friday I mentioned strong gains in Asia on the back of an impressive rally in the Semiconductor (SOX) Index. Two Asian countries that I mentioned were South Korea and Taiwan. It's no coincidence that in today's trading both of the those Asian countries are showing the biggest percentage gains in the face of more chip buying. In my recent book on Intermarket Analysis, I addressed the strong global link between the direction of semiconductor stocks and Asia. That's because Asia is a huge producer of semiconductors. The Asian country with the closest link to the SOX is Taiwan. The reason for that strong link is based on the fact that 29% of the Taiwan ETF holdings are in semiconductor and semiconductor equipment stocks. That's the heaviest chip weighting in Asia. Technology hardware & equipment stocks comprise another 25%. [That also explains why Asia is so closely tied to the fortunes of the technology-dominated Nasdaq market, which is leading the current global rebound]. Charts 1 and 2 show the close correlation between Taiwan and the SOX. Both markets peaked together in early 2002, bottomed together in October 2002, peaked again at the start of 2004, and are now turning up together. The link between the SOX and South Korea isn't quite as close as it is with Taiwan, but there is a positive correlation. SK has a 25% weighting in the chip group. With the chip stocks now enjoying a strong rebound, Asian markets (ex-Japan) are leading a global rally. One way to play the chip rally in Asia is with one of these two global ETFs that are traded on the American Stock Exchange.

Chart 1

Chart 2

Chart 3

OR YOU CAN BUY TAIWAN SEMICONDUCTOR ... Another way to participate in the Asian chip rally is by buying Taiwan Semiconductor. That's because TSM is the biggest holding in the Taiwan ETF fund (14%). Its three-year chart has a strong correlation with the Taiwan iShares and also appears to be bottoming (Chart 4). Chart 5 shows it starting to move up on strong volume. It's already broken its 50-day average and is nearing a test of its September high.

Chart 4

Chart 5

GLOBAL ROTATION FAVORS CHIPS ... While chip stocks are the day's strongest group, energy stocks are the weakest. I recently suggested that was a good combination for U.S. stocks and the world in general. I also suggested it might be time to take some short-term profits in the energy sector and put some money into chips. The same is the case on a global basis. Asia has been a relatively weak performer during 2004 owing mainly to weakness in the semiconductor group and technology in general. With both groups now on the rise, Asia (ex-Japan) is starting to look a lot stronger -- mainly in South Korea and Taiwan. Those countries should benefit from a global rotation away from energy and into the chips.