Why do we like a rally led by the semiconductors? What makes that something better than the transports, which were down 10 straight days in a row, or the health care stocks, or the industrials or the banks?
Simple: These days they stand for a heck of a lot more than just themselves. We often speak of housing, which represents 10% of the economy, punching above its weight. If housing is strong, then banks and retail could have a so-called bid underneath, meaning there might be buyers.
These days, in the new global economy, dominated by data, semiconductors mean so much more than they used to.
First, semiconductors had been a lead group, one that was represented by Nvidia (NVDA) on the fast growing side, Micron Technology (MU) on the commodity side, Broadcom (AVGO) on the acquisitive side, Skyworks Solutions (SWKS) on the cellphone side, NXP Semiconductor (NXPI) on the auto side and Lam Research (LRCX) on the capital equipment side.
Just like at a restaurant, that's a ton of sides.
But one by one in the drought that began in the spring of last year, each side peaked, leaving a ton of detritus along the roadside. Skyworks and Lam Research started the rollover. Skyworks, which is considered the most "Chinese" of the semis, began its cratering when the U.S. decided, at last, to fight back against the PRC.
Then Broadcom, which had been trying to buy Qualcomm (QCOM) , the brains behind a lot of the cellphone chips, gave up, deciding the Chinese -- and the U.S. -- wouldn't' let the deal consummate.
Qualcomm did the same at the same time. The Chinese were not going to let the cellphone brains buy the NXP brawn, a company which owns a very large chunk of automobile intellectual property.
At the same time, Lam Research began a process of shedding points piled up for ages, as those who know the group smelled a peak, one that the company ratified in October as a pause in orders.
Micron was brutal. The company had been saying right up into its spring peak that demand for DRAMs remained strong, even as flash had peaked, because of the secular trend of more and more sophisticated DRAMS that were much less commodity, much harder to make.
Turns out they can be made -- and too many of them were made. The stock began a hideous decline that ultimately saw the stock cut in half by the end of last year. That one really decked a lot of hedge funds.
Then Broadcom astonished the world by buying a pure software company, CA Technologies, that works with big old hardware, a total comeuppance to the entire chip cohort, but it didn't need Chinese approval.
Finally, Nvidia blew up in spectacular fashion, signaling weakness in gaming, artificial intelligence and data center -- something that had hit AMD, too, but AMD was never loved like Nvidia.
So, no more deals. Declining demand for auto, chips, a strangling by China that includes cellphone chips, overwhelming supply of commodity chips, peaking in data center and gaming commodity, the whole gamut, painting a picture of a worldwide slowdown in every end market coupled with an inability to consolidate an overpopulated group.
Then yesterday what happens?
By buying Mellanox Technologies (MLNX) , Nvidia decided to double down on data center and artificial intelligence, while at the same time defying worries that the Chinese will block the deal, signaling the thaw in relations that every bull is hoping for. We get an upgrade in Apple (AAPL) based, in part, on a hope that the inventory glut in chips is gone, which could mean that Apple's buying again.
Sure we don't have autos yet. But I wouldn't' want to short NXP (NXPI) . And if the commodity inventory heaviness is gone, that means that demand must be stronger than expected -- which is fabulous for Micron and Lam Research.
So, if you put it altogether, you have a picture of stronger worldwide demand coupled with a resurgence in data center/cloud spend and a more-positive long-term view of the China-U.S. tensions. Maybe even autos can come back -- and gaming can't be so horrible that it can pull down the rest of the mosaic of Nvidia earnings.
That's how a couple of research notes can lift an entire market, as so many stocks are caught up in the end markets that must be more solid than people think, certainly more solid than those who focus on the transports, or the labor report, or retail for that matter.
So now what happens? Simple: These stocks have changed the market's perception to the positive, and I believe the weakness we will get will be used to buy the dip -- and not run from the group, as was the case just a very short time ago.
