Here’s why I’m bullish on the semis
Massive strength in the Semiconductor sector sparked a broad-based rally that enabled the Nasdaq Composite to gain 1.5% and erase the previous day’s loss in the process. The S&P Midcap 400 Index also advanced 1.5%, while the small-cap Russell 2000 Index similarly rallied 1.6%. The S&P 500 gained 0.8% and the Dow Jones Industrials 0.6%. Opposite of the prior day, each of the major indices finished at their intraday highs.
Divergence between the Nasdaq and the S&P 500 was pretty clear yesterday if you analyze the volume levels. In the Nasdaq, total volume was 2% higher than the previous day’s level. Despite a 24% increase in turnover in the prior session’s “distribution day,” volume managed to rise even more yesterday. This is bullish because it indicates a heavier demand for stocks on the up day despite higher volume losses the previous day. However, total volume in the NYSE was 13% lighter than the previous day. Comparing the two exchanges, we see a bullish pattern in the Nasdaq but a bearish one in the NYSE. This divergence can be attributed to the fact that most of yesterday’s gains were concentrated within the technology arena.
Yesterday’s amazing 4.2% surge in the Semiconductor Index
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PowerRating) (iShares Semiconductor) for a potential long entry last week. After perfectly holding at support of its 50-day MA for the past week, IGW broke out yesterday and closed only fifty cents shy of its 52-week high. Because of relative strength in the SOX, we really like IGW for long entry over the highs of its consolidation. The daily chart of IGW below illustrates the recent bullish action:
While the Semis have clearly taken leadership of all the industry sectors, many other industries are still showing neutral to bearish patterns. While money flow into the tech arena was very strong yesterday, the rally was not incredibly broad-based and many sectors only recovered a fraction of their prior day’s losses. Therefore, it seems that divergence within the broad market is becoming even more distinct. We certainly feel that buying the semis and related tech stocks is a good bet here, but we do not feel the same about buying the broad-based ETFs such as
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PowerRating). In fact, we feel it is okay to remain short SPY or DIA unless they recover back above their February 27 highs because the market internals in Tuesday’s selloff were quite horrendous. For the lowest risk, consider positioning yourself on both sides of the market or simply sit on the sidelines and wait for the markets to get back in sync with each other.
Open ETF positions:
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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron’s other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .