SEMICONDUCTOR BUYING BOOSTS TAIWAN ETF WHICH IS DAY'S STRONGEST FOREIGN MARKET -- TAIWAN SEMICONDUCTOR IS BREAKING OUT
TAIWAN AND SEMICONDUCTOR ISHARES ARE DAY'S LEADERS ... As you've probably figured out by now, I try to look for meaningful linkages behind the day's headlines and the movements in various markets. One such linkage is evident in today's trading. Domestically, the day's strongest market group is the semiconductors. Globally, the day's strongest market is Taiwan. To explain why they're linked, I'll refer back to an early December message entitled "Semiconductors Resume Uptrend -- Asian ETFs Benefit From Chip Gains -- Taiwan Semiconductor Nears Bullish Breakout" (December 06, 2005). The link between chip stocks and Asia arises from the fact that chip stocks are heavily represented in that region of the world. The two Asian stock markets with the heaviest chip weighting are South Korea (21%) and Taiwan (23%). The December article focused on the Taiwan iShares (EWT) and Taiwan Semiconductor (TSM) which is the biggest holding in the EWT(12%). The December 6 article described the chart of the Taiwan iShares as a "triangular formation which favors an eventual move to the upside". The EWT has broken the upper resistance line and is now challenging its early 2004 peak (Chart 1). The EWT/S&P 500 ratio line has also turned up. Taiwan Semiconductor is achieving a bullish breakout of its own.
Chart 1
TSM IS HITTING THREE-YEAR HIGH ... Chart 2 is an updated version of the chart of Taiwan Semiconductor shown on December 6. At the time, the stock was testing a major resistance barrier near 10 which was the peak formed in mid-2003. To quote from that earlier analysis: "The pattern of higher lows over the last three years (see rising trendline) increases the odds for a bullish breakout". That bullish breakout may be occurring this week. TSM is trading at 10.36 in late afternoon trading which puts it at the highest level in three and half years. As I also wrote back in December, a bullish breakout in TSM "could give a big boost to Asian markets with a heavy chip weighting and Taiwan in particular". It appears to be doing just that.
Chart 2
SOX NEARS DECEMBER HIGH ... The next two charts show the recent upturn in the Semiconductor (SOX) Index and the Semiconductor Holders (SMH). Both recently bounced off their 50-day averages and are nearing a test of their December highs. The volume bars in Chart 4 show decent volume supporting the SMH rally during the first week of the new year. That may be enough to push it to a new 52-week high. That would be a positive sign for chip stocks and could give a further boost to the technology sector. It should also be a good sign for Asian markets like Taiwan.
Chart 3
Chart 4
SAY WHAT?... I received an e-mail from an unhappy reader this morning claiming that "thanks to your advice, I sold SMH at the bottom and now I am watching them shoot up". Just for the record, I'd appreciate it if the unnamed reader would enlighten me as to exactly when and where I "advised" selling the SMH.
