The Tech Sector and the Semiconductor Industry Will Face Hurdles in 2019

The second half of 2018 has been a tough one for investors. The indices themselves aren’t down all that much, but there have been some pretty violent swings. The S&P is only down 1.7% since the beginning of July, but it certainly feels worse. If you look at the 10 main sectors, seven are down more than the S&P while the three biggest defensive sectors are in positive territory.

The healthcare sector has led the way since the end of July with a gain of 10.6%. The utilities sector has gained 9.6%, and the consumer staples sector has gained 7.7%.

On the down side, the energy sector has lost 16% as the worst performer and the communication services sector is down 10.4% for the second worst performance. The tech sector has gotten a lot of media attention as it has moved down, but it is right in the middle of the group with a loss of 4.56% and just behind the industrial sector which is down 4.36%. These two sectors rank fifth and sixth among the 10 sectors, but they certainly garner more attention than the other sectors.

Part of the problem with the tech sector has been big declines in stocks like Facebook (Nasdaq: FB) and Netflix (Nasdaq: NFLX). Both companies are members of the FANG group of stocks and Facebook is down 24.9% since July 1 while Netflix is down 24.5%.

Another problem for the tech sector is the performance of the semiconductor industry. The iShares PHLX Semiconductor ETF (Nasdaq: SOXX) is down 8.3% since the beginning of July.

Looking at a chart of the Technology Select Sector SPDR Fund (NYSE: XLK) we see that the ETF just recently fell below its 52-week moving average. The 13-week moving average hasn’t crossed bearishly below the 52-week yet, but it looks like it will happen in the next week or two.

Seeing the stock drop below the 52-week and then having the 13-week move below the 52-week could become a problem moving forward. The two moving averages can both act as resistance as the fund tries to rebound.

In the bear market in 2007-2009, the fund dropped below the 52-week in January ’08 and then the 13-week crossed below it in February. The XLK attempted to rebound, but the rally stalled at the 52-week in May and then dropped close to 50% over the next six months. The 13-week didn’t move back above the 52-week until June ’09.

The problem could be even worse for the semiconductor sector. The 13-week moving average dropped below the 52-week in October.

At the start of the last bear market, the SOXX saw its 13-week drop below its 52-week in December ’07. The fund rallied in the first part of 2008, but the rally was halted at the 52-week in May. The fund fell another 60% from May ’08 through the low in November.

The charts are setting up very much like they did in 2007-2008. The chip sector turned lower first and then the tech sector. Even the time of the year is similar. We could very well see a few more weeks of downward movement followed by a rally in the first half of the year that takes the ETFs back up to their 52-week moving averages before they turn lower again.

Something else that could work against the chip sector in 2019 is an anticipated slowdown. Several analysts have issued cautious statements about the industry in the coming year. Analysts from CLSA, Morgan Stanley, and UBS have all issued concerns about revenue growth in the coming year. Part of the problem is the trade war, but that isn’t the only problem. There are also issues with pricing, building inventories, and slowing demand.

We may be at the beginning of the next bear market or this could still just be a correction in the market, but the tech sector and the semiconductor industry will both have a lot of resistance to work back through if they start to rebound. I would suggest using caution in both cases at this point in time.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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