Dan, Why Semiconductors?
I have mentioned them a few times in these pages but have never really addressed why I pay such close attention to semiconductors, in particular how they are performing relative to the broader market. Below is a blog post that I did for Chaikin Analytics
I was once asked which are the key charts that I used to develop my view on the market and how likely a trend is to continue or reverse. I included the usual suspects such as High Yield bonds (a proxy for risk appetite), the Advance / Decline Line (to get a sense of underlying participation in the trend) and Sector Rotation charts (to get a sense of leadership). I ended with a chart of the Semiconductors relative to the S&P 500.
We have all heard that the price of copper is an important economic indicator, and while I know that the economy is not the market (and vice versa), the two are closely aligned. I believe that semiconductors are as important, if not more so, for getting a read on the market as a whole and the technology sector in particular. Semiconductors are pervasive in our lives even though we don’t usually see them. Some of the more curious readers here may have actually taken apart a phone or a PC and looked at the inner workings of these devices but that is well above my head, honestly.
Here is what I found when I did a quick search for where semiconductors are used:
How semiconductors are used in everyday life? Since a semiconductor itself is not sold in stores as electrical appliances, it may be hard to understand, but in fact it is used in many electric appliances. For example, temperature sensors used in air conditioners are made with semiconductors. Rice cookers cook rice perfectly because semiconductors control the temperature precisely. CPUs that operate personal computers are also made with semiconductors. Many digital consumer products in everyday life such as mobile phones / smartphones, digital cameras, televisions, washing machines, refrigerators and LED bulbs also use semiconductors. In addition to consumer electronics, semiconductors play a central role in the operation of bank ATMs, trains, the internet, communications and other parts of social infrastructure, such as the medical network used for the care of elderly, among other things. Furthermore, efficient logistics systems help save energy and promote the preservation of the global environment.
And according to this report from Deloitte, the uses of semiconductors continue to expand:
Semiconductors are essential technology enablers that power many of the cutting-edge digital devices we use today. The global semiconductor industry is set to continue its robust growth well into the next decade due to emerging technologies such as autonomous driving, artificial intelligence (AI), 5G and Internet of Things. The semiconductor sector’s growth trajectory will flatten somewhat as demand for consumer electronics saturates. However, many emerging segments will provide semiconductor companies with abundant opportunities, particularly semiconductor use in the automotive sector and AI.
So it is clear that semiconductors are becoming more important in our lives and more important, in my opinion, to the global economy. But that is only partially the point that I am trying to make. The key point is how we can use this information to come up with a view on the market and its likely direction.
If I could only look at one chart to form a view on the market, it would be this one. The line in the main area of the chart is a ratio of the VanEck Semiconductor ETF (SMH) relative to the S&P 500. When the line is rising, SMH is outperforming the market.
Back to today: This is what it looks like over the past five years. Notice how it went sideways from late 2017 until late 2019. That is a two year time frame, that roughly coincides with what I believe was a bear market for global equities. It is now moving powerfully to the upside, in line with my view that we are in a new bull market.
This one chart drives much of views on the market and the investments that I make for myself.
*Please remember that this is not investment advice. If you are enjoying what you are reading, please considering sharing it with your network.