SEMICONDUCTOR BUYING MAY BE TIED TO STRONGER ASIA -- TAIWAN SEMICONDUCTOR AND TERADYNE ACHIEVE BULLISH BREAKOUTS -- SO DOES SEMICONDUCTOR HOLDERS -- THAT'S HELPING PUT NASDAQ IN NEW LEADERSHIP ROLE
NEW INTEREST IN CHIPS AND TAIWAN ... My June 14 story on new buying in semiconductors was greeted with some questions and some criticism. One reader suggested that I stop writing about the group because it had disappointed so many times in the past. Another asked how I could be positive on semiconductors at this late stage in the bull market. My response to both is that I report on what I see. Not only are semiconductors starting to attract new buying, several individual stocks are achieving bullish breakouts. Compared to the rest of the market, those stocks also appear relatively cheap. That in itself may explain some of the recent interest. Another explanation may have to do with strength in Asia. There's been a historical link between semiconductor stocks and Asia since that's where most of the chips are made. I pointed out last Friday (June 15) that Taiwan iShares were showing new global leadership. Let's start there. Chart 1 shows Taiwan iShares (EWT) hitting a new six-year high today. Its 3% gain makes it the strongest of the foreign ETFs (in a strong Asian region). What's more interesting is the recent upturn in the EWT:EFA relative strength ratio (bottom of Chart 1). That's the first sign of any upside leadership coming from Taiwan in a long time. Now look at Chart 2. The blue line is the same EWT:EFA ratio. The red line is the Semiconductor (SOX) Index divided by the S&P 500. There appears to be a correlation between the two ratios. That suggests to me that renewed interest in chip stocks is also tied to renewed interest in Taiwan. Taiwan Semiconductor has a lot to do with that.
Chart 1
Chart 2
TAIWAN SEMICONDUCTOR HTS NEW FIVE-YEAR HIGH ... Last Friday I showed Taiwan Semiconductor moving up to test its early 2007 highs. It's breaking through them today. That puts the stock at a new five-year high. It's relative strength ratio bottomed a month ago. TSM is the biggest holding (13%) in the Taiwan iShares. The point & figure boxes (using a 1% scale) in Chart 4 confirm today's bullish breakout in the stock.
Chart 3
Chart 4
TERADYNE IS BREAKING OUT ... My June 14 article showed SOX leadership coming from Intel, KLAC, National Semiconductor, and Texas Instruments. Let's add Teradyne to that list. The daily bars in Chart 5 show Teradyne trading at a new 52-week high. That's only part of the story. The weekly bars in Chart 6 show the stock just breaking through its early 2006 highs which puts it at a new three-year high. The point & figure boxes in Chart 7 also show the bullish breakout (green box). [The letter 6 stands for June]. I changed the box value from 1% to 3% to show more chart history.
Chart 5
Chart 6
Chart 7
SEMICONDUCTOR HOLDERS BREAKOUT ... Using a 2% box size, Chart 9 shows the Semiconductor Holders (SMH) trading at a new 52-week high today. The next upside objective is its early 2006 peak near 40. Although the SOX hit a new 52-week high today, Chart 10 shows it needing a close at 516.29 or higher to achieve a p&f breakout as well. Semiconductor Holders have been in a p&f uptrend since January; the SOX since April. There's no guarantee the upside breakouts will hold. But that's not a good enough reason to ignore the positive chart action.
Chart 8
Chart 9
NASDAQ SHOWING NEW LEADERSHIP ... I suggested in my June 14 article that SOX buying was contibuting to new Nasdaq leadership. Chart 10 shows the QQQ Trust (QQQQ) trading near a new 2007 high today. Of more importance is the new five-month high in the QQQQ/S&P ratio (bottom of Chart 10). That shows that the Nasdaq market is showing market leadership for the first time this year. A lot of that is coming from the chip stocks. [Two of the top percentage gainers in the QQQQ today are chip stocks -- MXIM (+3.1%) and SNDK (+3.8%)].
Chart 10
