Since the Christmas low, the semiconductor industry has been among the top performing groups—outpacing the tech sector as a whole and the overall market. However, the chip sector has gotten hit with some selling pressure in the last week and the industry has been lagging the overall market as a result.
From March 21 through March 27, the VanEck Vectors Semiconductor ETF (NYSE: SMH) dropped 4.6%. The S&P 500 was down during this same stretch, but only by 1.73%. The Technology Select Sector SPDR (NYSE: XLK), which represents the tech sector as a whole, was down 2.81%. Granted we are only talking about one week, but it is coming at a time when the market is looking for some kind of stimulus and we are just a few weeks away from the next earnings season.
The chip industry is considered by many to be a leading indicator for the tech sector as a whole. If you look back at the SMH and how it performed in the late 90’s and into early 2000, the SMH blew away the performance of the S&P and the XLK. However, when the market turned in late 2000, the SMH got hit much harder than the overall market and the tech sector.
From January ’99 through March ’00, the SMH jumped over 275% while the S&P gained a mere 13.6%. The XLK gained 81% during the same stretch. From March ’00 through October ’02, the SMH dropped over 80% while the S&P dropped 41%.
Once the bear market ended and the market started moving higher again, the SMH outperformed once again, jumping over 140% from October ’02 through January ’04. The S&P gained approximately 40% during this same stretch and the XLK gained over 75%.
In the next bear market, from 2007-2009, the SMH peaked in July ’07 while the S&P peaked in October. From the peak in July ’07 through the low in November ’02, the SMH dropped 61.8%. The S&P saw a similar percentage loss that time around, falling 57% from October ’07 through March ’09. But notice that the SMH peaked and bottomed before the overall market.
When the SMH bottomed in November ’08, it outperformed the overall market and the tech sector for the next 18 months. Since November 20, 2008, the SMH is up almost 700%. The XLK is up 467% and the S&P is up over 200% since that same date.
The SMH underperformed the market in 2018, losing 15.6% on the year. From the bottom on December 24 through March 21, the SMH gained 36% and that was better than the XLK which gained 31% and the S&P which gained 21.4%. Notice the date of March 21? That is the day after Micron Technology reported earnings. Micron jumped almost 10% on the 21st, however it has fallen 10.6% since.
The decline in the chip industry has coincided with the fall in Micron, and my concern is that it is a bad sign for the industry as a whole. The industry will take center stage on the earnings front during the week of April 22- 26 when industry giants like Intel, Texas Instruments, and Advanced Micro Devices will all report first quarter results.
If we see similar reactions to the earnings of these companies that we saw with Micron, it could mean bad news for the tech sector and the overall market. Micron beat its EPS and revenue estimates, but the euphoria didn’t last very long. My concern is that there was something in the report that took time to find and that has led to the pullback. As I have pointed out before, I am not a forensic accountant that digs deep into earnings reports and such. I analyze the stock, its actions, and the sentiment toward the stock.
I am not jumping into a bunch of bearish trades just yet, but I am concerned about the chip sector falling so sharply in the last week. If we see more selling after the other earnings reports, I will likely add bearish positions to my portfolio.