Interesting Times for a Loathed Sector

 | Feb 04, 2013 | 7:45 AM EST
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Well, I'm glad the Dow finally got above 14,000 -- because that means we'll no longer need to wait for it.

It won't surprise you to know that, once again, there were fewer stocks at new highs to coincide with lower highs in all the indicators -- in other words, a batch of negative divergences -- but clearly none of that matters to a market on a mission. So let's take a look at the chart of the Philadelphia Semiconductor Index (SOX).

I can just see folks rolling their eyes. The chipmakers? Are you joking? They are so irrelevant.  Well, you might recall that that's what everyone said in late October, when the semis were quite out of favor. I actually liked this group at that point, as I believed it would lift once the mutual-fund selling was done. Remember? The personal computer is dead, and long live Apple (AAPL)? Since then the SOX has gained almost 20% and Apple has sunk more than 20%.


What has caught my eye, however, is the long-term trendline that the SOX is now hitting. Above is a three-year chart showing the resistance just overhead, at 420-ish, from the downtrend line and previous highs. What I find even more fascinating is that this line actually goes all the way back to 2001 -- and should the index cross over it, that would actually complete the base. (Do note that this trendline doesn't encompass the all-time highs of 2000, which are unlikely to ever be seen again.)


The last three times the SOX has gotten to this trendline, it has flirted with a breakout before heading lower. While you may think this index is irrelevant -- and I realize many do -- notice that point A is July 2007, point B is February 2011 and point C is March 2012.

I have always thought the action in the semis is directly related to that of the Nasdaq, and I have highlighted that ratio several times over the years. But I had never looked at these attempted trend breaks relative to the S&P. While you'll probably remember what happened after point A, July 2007, do take a look at where the S&P was at point B and at point C.

S&P 500

What I found even more interesting was that, each time the SOX reached that long-term downtrend line, it was after a relentless rise in the broad market. On the S&P chart, points B and C come after similar no-correction rallies similar to what we're seeing today.

I think the SOX will likely rise to the 425-to-430 area and then stop. I will also be on the alert for too much positive chatter about this, since that would be a sure sign that the hate for this group has finally come to an end.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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