Semiconductors are among the outperforming stock market segments since last summer. The semiconductors index SOX has risen from 750 points in September last year to 1091 points today. That is a staggering 45 percent increase, quite amazing.
Now that is becoming an issue. Once an index gets to a 50 percent increase it is time to re-evaluate things. A strong rise is certainly bullish, but at a certain point buying pressure fades. We start sensing that the upside potential is close to the point of drying up.
This is what we would call the 50 percent rally effect.
Moreover, from a chart perspective, the trend channel on the chart of the semiconductor index is another warning sign. The price of the index has reached the resistance line of the channel. That is not a point to become aggressive. On the contrary, that is a point to become defensive and cautious.
The performance of semiconductors has been impressive, and that has lead to an overly bullish sentiment. That is, from a sentiment analysis point of view, a red flag.
Because of the combination of the 50 percent rise effect, the trend channel effect (resistance area) and the sentiment, we believe that investors should become defensive at this point in time. Our Market Barometer Suggests Serious Volatility as of this summer. Once markets start correcting, and they will, semiconductors could fall rather sharply.