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Issue #86 - Semiconductor And Large Cap Tech Selloff

Issue #86 - Semiconductor And Large Cap Tech Selloff
Photo by Igor Omilaev / Unsplash

Trend Of The Major Indices And Market Health

The biggest weekly selloff of the year hit the technology space with the S&P 500 down -1.97% for the week. Volume was above average for the week and there's now been 2 out of the last 4 weeks with heavier downside volume for the S&P 500. The Nasdaq 100 was down a whopping -3.96% for the week and is already in correction falling more than -5% off of its highs last week. The Nasdaq Composite was also down big falling -3.65% for the week. The Russell 2000 was up 1.74% for the week, but closed well off of its highs and had a weekly reversal on heavy volume. Besides the last week of the April 2024 correction, this was one of the most bearish weeks for the stock market in 2024.

With earnings season ramping up significantly next week is it possible big money has started to exit the market ahead of it? Remember consumer cyclical has been under major pressure all year in the stock market and there was more signs of weakness this week. DPZ tanked after earnings and gave up all of its gains for 2024, and FIVE which is a Stage 4 consumer cyclical stock actually pre-announced earnings guidance and fired their CEO. Both of these stocks were sold off hard on heavy volume. CMG a former big winner in 2024 has now broken its 30-week EMA on volume and has given up a big portion of its gains for 2024. CELH, a former high flyer which was up close to triple digits at one point in 2024 is now down about -50% from its highs since late May. Even COST, which is another big winner in consumer cyclical stocks from mid-2023 has sold off on heavier volume two weeks in a row and could break its 10-week EMA. Consumer cyclical continues to be a major red flag, and with earnings season approaching there might be more carnage coming.

The VIX exploded higher this week and closed above both the 10-week and 30-week EMA (Exponential Moving Average). This was the biggest weekly move higher in the VIX in 2024. Along with that volume in inverse ETFs poured in with DUST, JDST, LABD, SOXS, SPXS, and UVXY trading their heaviest weekly upside volume of the year this week. And TZA which is a widely traded inverse ETF against the small caps printed a weekly reversal candle on its heaviest weekly volume ever this week. Clearly big money was moving into instruments hedging against the stock market.

The bottom line is the market reacted very negatively to the semiconductor and large cap tech selloff this week. There's clear evidence in the market of major positioning going into bearish ETFs against the major indices. The S&P 500 is once again back below its 20dema, so the trend higher is under pressure. The Sector Review will discuss more on the U.S. dollar but it will be very pivotal next week in determining whether the market moves into a deeper correction. Earnings season will also start to play a bigger role, so there's potential for more volatility than just what was witnessed this week.

With the weight of the evidence shifting bearish this is a good time to get more defensive along with the market. The bulls now need to prove this was just a short correction by seeing recent breakouts find support, and new breakouts on volume. Otherwise the bears have taken control of this market with some high volume selling off of the recent top.

Sector Review

Cryptocurrency (GBTC) - the big bright spot for the week was cryptocurrencies which continued their bounce from recent lows. Bitcoin closed near the highs of the week, and both ethereum and solana closed at the highs of the week with it. The major cryptocurrencies are now back above key moving averages. This remains a top sector to look for trading opportunities on the long side, especially with the strength displayed this week.

Gold and Silver (GLD, SLV, SIL, GDX) - gold has a potential failed breakout on the weekly chart on heavier volume. The mining stocks however acted fairly well this week, especially in silver where SIL was down much less than SLV. NEM a major gold miner reports earnings next week and could be a driver of the sector if the reaction to earnings is positive.

Cannabis (MSOS, MJ) - cannabis stocks started to continue higher early in the week but sold off with the heavy overall market to close the week. Volume however was light on the pullback and many of these stocks are sitting right on top of key moving averages. So there's still opportunity to continue higher next week if the overall market cooperates.

Semiconductors (SMH) - ASML kicked off the carnage in semiconductors by gapping down after earnings on heavy volume on Wednesday. By the end of the week ASML wiped out almost all of its gains off of the April 2024 lows. TSM also reported earnings this week and despite strong earnings it closed at the lows of the week and traded its largest weekly downside volume in more than 10 years. AMD which had started a breakout attempt also gave up all of its recent gains and closed at the lows of the week. With even more evidence this sector has put in a major top it should continue to be avoided to the long side.

Financials (XLF) - the financials have been a major winner this year but XLF reversed on heavier volume this week and now has a potential failed breakout setup which would be bearish for the S&P 500. This sector has helped keep the markets in an uptrend this year with JPM being a mega-cap leader.

U.S. Dollar ($USD) - the U.S. dollar closed off the lows of the week but is still below the 10-week EMA and 30-week EMA. If the S&P 500 is going to continue higher next week the U.S. dollar needs to remain below these key moving averages. The action in bitcoin this week could be suggesting the U.S. dollar might remain weak.

Stage 2 Breakouts

Cryptocurrency stocks were the only sector that had multiple stocks acting well this week. But most of the stocks in this sector closed well off of their highs for the week with pressure from the overall market. Cryptocurrency by itself won't be able to lead this market higher, so more leading sectors need to resume higher next week for this uptrend to resume.

Biotech could be another sector that turns around next week as the sector ETF XBI pulled back on lighter volume to end the week. Oil and gas stocks were also strong last week, and the commodity ETF GCC is pulling back to key moving averages. Commodity related sectors should do well if the U.S. dollar remains under pressure.

Remember a lack of new Stage 2 breakouts is another warning sign of a potential top in the stock market. This week the total number of breakouts dropped dramatically. If earnings season puts a damper on new breakouts that would be a major warning sign and moving to cash would be the appropriate course of action.

Best Stage 2 Breakouts

MSTR, CLSK, CIFR are cryptocurrency stocks that moved up on volume this week, but CLSK and CIFR closed off the highs of the week. All of these stocks have no resistance or minimal overhead resistance.

PAYS is a fintech stock with a Stage 2 continuation breakout on volume.

PLG is a precious metal miner that had a big reversal at the 10-week EMA on heavy volume.

UNH is the largest Dow component and a healthcare stock completing a Stage 2 breakout on volume this week.

The following are the best Stage 2 breakouts from the past week:

MSTR, CLSK, CIFR, PAYS, PLG, UNH

All Stage 2 Breakouts From The Past Week

Cryptocurrency stocks - MSTR, MARA, BITF, CLSK, CIFR, RIOT

Semiconductor stocks - GFS

Fintech stocks - PAYS, SOFI

Healthcare/Biotech stocks - UNH, ANGO, GRAL, JNJ

Gold and Silver Mining stocks - PLG

Tech stocks - EB, EGHT, RUM, SMAR

Industrials stocks - SWBI

Consumer Cyclical stocks - TDUP

Real Estate stocks - EXPI, OPEN

Oil and Gas stocks - SLB

Financials stocks - AWP

Basic Materials stocks - ASTL

Utilities stocks - HE

(Note: Stocks in bold broke out on 2x average weekly volume or higher for the week)

Stage 2 Breakout Pullbacks

With pressure coming into the overall market this week there's an opportunity to buy pullbacks in some stocks that have recently started moving higher. However if most of these stocks don't do much next week that would be a major warning sign. Breakouts that fail are the hallmark of a weak market, and some of these have pulled back to their breakout areas. So there are clear areas to take a stop if the market remains weak and puts a lid on new breakouts.

Cannabis stocks would be another sector that could get going again after a major correction recently. Copper stocks have also had a major pullback now and first retest of the 30-week EMA after their breakout. As discussed in the Moving Averages For Trading document copper stocks are at a good buy point to continue their uptrend higher.

Cannabis stocks - ACB, CGC, SNDL, CRON

Gold and Silver Mining stocks - CDE, EXK

Copper stocks - TGB, SCCO

Autos stocks - LCID

Artificial Intelligence stocks - SOUN, UPST

Solar stocks - NOVA

Consumer Cyclical stocks - WING

Focused Watchlist

Big volume came into inverse ETFs last week and they are once again setup for Stage 2 breakout. After a big week this past week, a pullback in these would be a better setup against the 20dema or the gap on the daily chart from Wednesday. Watch for volume to dry up on the pullback. The recent July lows could be used as a stop.

Inverse ETFs - SOXS, SPXS, SQQQ, UVXY

Correction Playbook Statistics

With just one correction in the S&P 500 in the books still for 2024 (the April 2024 -5% correction) this is a good time to study what has happened in the past regarding corrections in the stock market. Remember handling corrections well is the most important part of maintaining longevity in the stock market. Corrections in the S&P 500 can incur major damage to individual stocks. A routine -5% pullback in the S&P 500 can cause a -20% to -30% loss in an individual stock.

Here's some statistics compiled from the last 44 years of the S&P 500 corrections from 1980 - 2024. To get more education on studying corrections in the stock market check out the Correction Playbook:

  • The S&P 500 averages two -5% corrections per year and almost one -10% correction per year
  • Since 1990 the number of corrections per year has slightly decreased compared to the 1980s, but overall the entire time period is pretty consistent
  • There was only one year in the 1980s and 1990s that had one or less corrections which was 1995 with zero corrections
  • 1995 and 2017 are the only two years since 1980 with zero corrections
  • 2013 and 2006 each only had one correction

In terms of 2024 from a correction perspective this year is an outlier so far if it continues to have just one correction. So more than likely for the rest of 2024 there will probably be one if not two more corrections, and there could be a -10% correction still in the cards for 2024. This would still make 2024 just an average year in the stock market.

Corrections tend to take the S&P 500 back to the 30-week EMA. Interestingly the April 2024 correction did not take the S&P 500 down to this key moving average, and the S&P 500 still hasn't retested this moving average since October 2023. This is another example of rare price action in 2024 as there are few years in the S&P 500 where price action occurs entirely above the 30-week EMA. It's likely that there will be at least one retest of this moving average before the end of 2024. If the S&P 500 were to go down an retest the 30-week EMA off of the recent highs the correction would be almost -10% in magnitude.

Summary

Big selling in semiconductors and large cap tech impacted the rest of the market. The U.S. dollar is the key heading into next week, if it stays weak the stock market will have a better chance of continuing higher. Earnings season ramps up next week and will have a big impact on the market. The bulls need to prove they can carry this market higher now by producing more Stage 2 breakouts on volume. The market is clearly rotating out of semiconductors and large cap tech so the leadership in cryptocurrency stocks needs to broaden out again to other stocks. If it doesn't the market will likely continue lower into its second correction for 2024. The Timing Model has all of the potential indicators of a top in the stock market flashing right now, so its critical to see positive price action next week or the market will continue into a correction.

Education

Besides weekly commentary the education portion of this newsletter continues to grow.

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Published by:

Justin Smyth