The choppy market action continues and the weak underlying action I discussed yesterday is starting to matter. As I mentioned, the number of new 12-month lows was surprising low yesterday and even expanded as the market bounced. In addition, breadth has been poor. The market's biggest problem hasn't been support but a lack of strong and broad momentum. Today it looks like the momentum chasers may be growing tired of trying.
I am not doing any new buying right and am concerned about some of the breakdowns I'm seeing. The best looking name on my radar continues to be Sarepta (SRPT) which has news due later today.
The semiconductor group is leading to the downside today. It has always been highly cyclical but many market players seem to forget this. When the stocks in this group have their best earnings and low PE's they are often near a top and vice versa. Over the years Micron (MU) has often been one of the best illustrations of how the chip sector goes through cycles.
In the fiscal year ending in August 2016, Micron earned $0.26 and had a PE ratio of 88. In the fiscal year ending August 2018, Micron had earnings of $11.76 and a trailing PE of just 4. A PE of just 4 sounds like quite a bargain especially since the company is expected to earn $11.34 in the next fiscal year. However, the market has seen this story before from Micron. It was a leader in the chip sector in 2000 and developed in a very similar way. Here is an article from March 22, 2000 about Micron that could have been written within the past few months. Expectations were at extremely high levels just before the cycle turned.
Semiconductors are one of those groups that are often justified on the basis that 'this time is different'. Analysts have a tendency to think that the regular cycles simply won't apply and they are almost always wrong. The timing is never easy but it looks like market players have once again discovered the cyclical nature of chips and Micron in particular. History suggests it is going to take a while for the cycle to hit bottom again. There is no rush to buy Micron especially since the great likelihood is that the current estimates are going to come down fast.
