Are Semiconductors Warning of Future Tech Sector Weakness?

Back in 2014 I wrote a post (which Bloomberg picked as their Chart of the Day) outlining how semiconductors had replaced copper as the new barometer for the market. For quite a while copper was thought to have had a PhD in economics, as its price movement acted as a good indicator of economic activity. As the U.S. (and the global) economy shift to be more technology-focused, semiconductors took over at head of the class.

With the prominent use of semi’s in the tech space, they become an obvious tool to be used in evaluating the technology sector. Below is a chart showing the relative performance ratio between semiconductors ($SMH) and the S&P 500 ($SPY), with its respective Relative Strength Index (RSI) in the top panel.

Over the last several years when momentum, as measured by the RSI, diverges (making a lower high as the ratio between $SMH and $SPY makes a higher high), a trend reversal often follows as semiconductors begin to under-perform the overall U.S. equity market. This has also led to lackluster performance by the tech sector ($XLK) as well. In the bottom panel of the chart we have the ratio of $XLK and $SPY, and when $XLK is outpacing $SPY (by either going up more or going down less) the line rises.

The opposite is also true, when momentum for the $SMH and $SPY ratio creates a positive divergence, as it did in February of this year and August of last year, the tech sector’s trend in under-performance has reversed.

Since early November, semiconductors have seen a strong performance. and recently the ratio between semi’s and the S&P 500 made an attempt to break to a new high, surpassing its prior October peak. However, the breakout was accompanied by a bearish divergence in momentum and as of this writing, has failed to hold. This false breakout and bearish divergence creates a poor environment for $XLK, as its relative performance often mirrors that of semiconductors. I think it’s also important to note that while the $SMH-$SPY ratio got back to its prior October high, the $XLK-$SPY ratio did not, an additional sign of technology weakness.

smh-spy

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

The Relationship Between Stocks and Bonds Remains in a Range

Miss me? I haven’t been as active on the blog as I would like but I still share quite a bit on Twitter and StockTwits, so make sure follow me there to keep up with my insights and charts. Anyway, let’s get into it…

We are close to finishing out the historically bearish period of seasonality for equities and while we didn’t see any kind of crash that many traders were hoping for expecting, the S&P is up nearly 4% and saw just a 5% drop back in June. Overall, not a terrible summer when all things considered.

The chart I’d like to discuss today is of the weekly un-adjusted (not accounting for dividends) ratio between the S&P 500 ($SPY) and 20+ Year Treasury Bond ETF ($TLT) over the last seven years. As a reminder, when $SPY is outperforming $TLT the line rises and when the opposite happens the line declines, this doesn’t mean equities are appreciating, it simply shows which data set is rising more (or falling less) than the other.

I think it’s important to monitor the relationship between stocks and bonds and that’s exactly what this chart helps us do. The ratio between these two markets has been in somewhat of a range since late-2013 as it has been unable to produce a meaningful new high or lower lows. This creates a consolidation triangle pattern that we can view as levels of support and resistance with regards to the relative performance of $SPY and $TLT.

As the chart below shows, the ratio has found prior support at 1.45, which if broken could see a decline down to 1.35 which is the last significant area of price memory (2010 turning point and 2013 slight decline). On the upside we have a declining trend line connecting the lower highs since 2015. A break here could see $SPY outpace $TLT with the ratio rising back to its prior high around 1.80. To better gauge a break of either resistance or support (one will eventually have to happen whether it’s due to pacing of time or price movement) I’ll evaluate trend strength (not shown on chart) to better understand the potential the break has ‘staying power’ and the potential of a false break or reversal. But at this point, we have our levels and can be patient, allowing the market to dictate a bias.

stocks-vs-bonds

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Does Trading Volume Support the Trend in Stocks?

The last post I wrote took a long-term look at the S&P 500 from a monthly viewpoint. Today I want to look at the S&P 500 SPDR ETF ($SPY) on a daily chart but focus on volume and what it has to say about the current trend.

I’m using the S&P ETF rather than the index itself to get a ‘truer’ view of volume flow. There are two indicators I want to look at when analyzing volume: On Balance Volume (OBV) and Accumulation/Distribution. Both of these tools take into account the raw amount of shares traded but the way it’s used is different for each tool.

Let’s first look at On Balance Volume. This indicator simply adds the number of shares traded when $SPY is positive for the day and subtracts the number of shares traded when the ETF has negative performance for a day. This helps us see if there is more volume being traded on up or down days. When $SPY is being bid higher we’d prefer to see more activity and on down days see fewer shares traded. Now of course this doesn’t necessarily mean there are more or less traders involved on each days, as one person can buy 100,000 shares and it would have the same impact to volume as 100 investors trading a 1,000 shares. But it’s accessing the amount of activity that volume can help us see.

Currently, for 2015, we are seeing a larger number of shares exchanging hands on down days than up days as On Balance Volume has been declining since its late-December peak. This is creating a negative divergence with price as $SPY has been advancing (albeit at a choppy pace) for the bulk of the last four months.

SPY volumeNext we have the Accumulation/Distribution indicator. Like OBV, the Accum/Dist tool uses volume in its measurement. However the difference is it doesn’t simply add and subtract volume based on if price finishes higher or lower on the day. Instead, this volume indicator looks at the range in which price traded that day and whether it closed in the higher or lower end of that range. At the start of this year we had a series of decent amount of volume being traded with the close on $SPY being in the top of the daily range. This pushed the Accumulation/Distribution indicator higher through January and February. However, since March it’s leveled out – similar to what’s taken place in price.

So what does all have to say about volume and whether it supports the current price action in the equity market? I think we currently have a mixed bag. On the surface we have less trading activity on up days for the S&P 500 ($SPY) than on down days shown by the OBV indicator, but at the same time price has been able to stabilize itself intraday and close near the higher end of its range as shown in the Accum/Dist data. At a quick glance, 2011 appears to have displayed a similar type of movement. With more shares traded on down days going into the intra-year peak in May. We’ll see if the bearish action in price that took place in ’11 repeats itself during this year. Just because volume diverged in 2011 doesn’t mean we see a near-bear market in 2015. I”ll be watching price more closely for signs of distress.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.