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3 Reasons Why Semiconductors Are Poised To Lead

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Okay, let's start with the short-term reason.  Throughout much of this bull market, the month of May has been kind to semiconductors ($DJUSSC).  In fact, the DJUSSC has advanced in each of the last 7 years during May.  Check out this seasonal pattern:


Not only have semiconductors moved higher during May, but they have scorched higher!  Their average May return of 7.1% over these past 7 years more than doubles any other calendar month.  Go away in May?  I think not!

Next, consider what drives the stock market higher.  I'd be hard-pressed to find another area of the market more positively correlated with the S&P 500 than semiconductors.  If the DJUSSC is advancing, there's a pretty decent chance the S&P 500 is moving right along with it:

During the past decade, the above chart illustrates how closely tied the S&P 500 is to the DJUSSC.  The correlation coefficient has been almost exclusively between +.50 and +1.00.  Drops below that zone have not lasted long at all.

Finally, let's consider the technical pattern of semiconductors over the long-term.  Take a look at the 10 year weekly chart:

There have been two prior instances when the DJUSSC has consolidated sideways for at least one year - from 2011 to 2013 and from late-2014 to 2016.  In both cases, once price resistance was cleared, the DJUSSC soared higher.  The DJUSSC formed a double top in the first half of 2018 and, after consolidating for more than a year, it just broke out again.  This bodes well for semiconductors and also for the S&P 500.

We're going higher.

Two semiconductor stocks are among my favorites to trade currently and are amongst a handful of solid trading candidates overall.  If you trade individual stocks and you'd like to see these annotated charts, send me an email at tomb@stockcharts.com.  I'll send them to you over the weekend.  You won't need to be a StockCharts member to view these charts, but you will need to be a member in order to download and save the charts into a StockCharts ChartList.

Happy trading!

Tom

Tom Bowley
About the author: co-founded Invested Central and served as the site's Chief Market Strategist for more than 10 years. His unique trading style combines both his fundamental and technical strategies to systematically manage risk while trading. A regular contributor to StockCharts.com's bi-weekly ChartWatchers newsletter since 2006, Tom's role at StockCharts has expanded significantly since he joined the company as a full-time Senior Technical Analyst in March of 2015. Learn More
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