RISING SOX IS PULLING ASIA HIGHER -- YOU CAN BUY THE TAIWAN ETF OR TAIWAN SEMICONDUCTOR -- BUYING JAPANESE STOCKS AND THE YEN WITH ONE ETF -- GLOBAL RALLY IS GOOD FOR US
SOX IS CHALLENGING 200-DAY LINE... A strong technology sector is leading the market into a broad-based rally today with the major stock indexes resuming their fourth quarter uptrends. Good news from Hewlett Packard and Kmart's purchase of Sears helped light the fuse. The strongest technology group, however, is the Semiconductor (SOX) Index which is up more than 4%. More importantly, Chart 1 shows the SOX trying to break through its (red) 200-day moving average. I believe that test will be successful -- if not today, then soon enough. I've written several bullish articles on the chip group over the last month and why that would be good for the U. S. market. Today, I want to return to a piece I wrote in early October (October 04, 2004) on why the SOX rally was contributing to global leadership in Asia -- particularly in South Korea and Taiwan. And why Taiwan Semiconductor was so important.
Chart 1
TAIWAN AND SOUTH KOREA HAVE STRONG CHIP LINKS... This is the headline that I wrote on October 4. That's because Asia is closely tied to the semiconductor industry. This is especially true for Taiwan and South Korea whose stock markets have the heaviest chip weighting in Asia. Semiconductors account for 29% of the Taiwan ETF holdings (EWT) and 25% in South Korea (EWY). Taiwan Semiconductor is the biggest stock in the Taiwan ETF (14%). That makes it very important (more on that later). It's no coincidence that with the SOX Index leading the U.S. market higher today, the two strongest international ETFs are Taiwan and South Korea. The next three charts show the close correlation between the two Asian markets and the SOX. Although their peaks and troughs don't always occur at exactly the same time, they do follow one another pretty closely. At the start of 2004, the SOX peaked before Asia. The SOX September bottom, however, came a month after the two Asian markets bottomed. That's a benefit of intermarket work. When one market turns, closely correlated markets usually turn shortly thereafter. The upturn in Asia in August warned that the SOX would turn up before too long. And it did. The fact that the South Korean and Taiwanese ETFs have already risen above their 200-day lines also means that the SOX will do so shortly -- if not today. The market message on October 4 was that buying one of the Asian ETFs was one way to play the global chip rally.
Chart 2
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Chart 4
OR YOU CAN BUY TAIWAN SEMICONDUCTOR... This headline is also taken from October to show that, as an alternative to the Taiwan ETF, an investor could buy Taiwan Semiconductor (TSM) which was the biggest holding in the EWT. Here's another benefit of intermarket work. Back on October 4, I suggested that since Taiwan Semiconductor was closely correlated with the Taiwan ETF, it too would probably turn up shortly. At the time, TSM was just starting to move up on rising volume. Since then, it's done a lot better. Last week's upside breakout through its September high came on very strong volume. Today, the stock is breaking decisively through its 200-day average and reaching a new six-month high. By buying TSM, you can own a rising chip stock and participate in the Asian rally as well. Chart 6 shows a point & figure chart of TSM. An initial buy signal was given during October at 7.18. Another buy took place at 7.40. (A buy signal takes place whenever a column is x's exceed a previous x column). The green x's show another buy signal taking place today. A sell stop can be placed under the last column of o's.
Chart 5
Chart 6
LAND OF THE RISING ETF ... Earlier in the week, I showed the Japan iShares turning up and suggested that might be partially due to falling oil prices. I also suggested that a rising Japanese yen could start attracting foreign capital into the Japanese stock market. One of our readers correctly pointed out that by buying the Japanese ETF (EWJ), an investor would benefit both from a rising Japanese stock market and a rising yen. That's good news because both are rising again today. Chart 7 shows the EWJ hitting a new recovery high and reaching the highest level since July. At the same time, the Japanese yen is soaring to the highest level since the spring. The yen rally is tied to another drop in the U.S. dollar, which is boosting gold prices to another 16-year high. It's all related. Rising Asian chip stocks are also good for our stock market which continues to benefit from relative strength in global technology stocks. Rising global markets are good for our market as well since global markets are linked.
Chart 7
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