Friday, March 20, 2009

Semiconductor Sector: Potential For Secular Run

I like to seek out assets or sectors where the secular winds will propel prices higher. In other words, I am looking for the "next big thing", and the semiconductor sector would qualify. From a technical perspective, this sector has all the right attributes to undergo a prolong run.

Figure 1 shows a monthly chart of the PHLX Semiconductor Sector Index (symbol: $SOX). The indicator in the lower panel is our "next big thing" indicator, and as we can see it is in that zone where a secular trend change is typically launched from. The "next big thing" indicator isn't so much a timing tool, and this can be seen by the vertical gray line when the indicator went into "the zone" back in 2002. This was early and prior to the ultimate bottom. Nonetheless, the indicator tends to identify the potential for a secular trend change. In other words, you have to be able to walk before you can run, and many assets will cycle through this phase. This is rather consistent across assets and time.This is not an indicator for the 10 minutes or 10 weeks. We are looking where I want to be for the next 10 months!

Figure 1. $SOX/ monthly

What does the indicator measure? While proprietary, I will say that the indicator measures as much on the y axis (i.e., price) as it does on the x axis (i.e., time). Most indicators and technicians just look at price; I am also looking at time.

Other technical tidbits are worth noting. See figure 2 a monthly chart. Prices are in the range of the August, 1998 and October, 2002 lows. Past bottoms were made in these areas. The indicator in the lower panel looks at the current price relative to past pivot points over a 36 month time look back period. The down trend (black line) of the indicator has been broken, which I interpret as the down trend in price being broken as well.

Figure 2. $SOX/ monthly

The technical evidence suggests that "the bottom" is in for semiconductors. The potential for a secular trend change is there. If the general market gains traction - a big "if" here as I view the current market rally as a counter trend rally in an ongoing bear market - then it would not surprise me to see the semiconductor sector providing leadership.

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