We believe that the Semiconductor Index (SOX) is poised to move sharply lower in the months ahead into a tradable bottom. Our target is rising trendline support near 280, which presupposes a decline of -31% between now and then. Our reasoning is rather simple: First, the fundamental backdrop has been, and will continue to deteriorate in the months ahead as the Fed's previous interest rate increases come to bear. This suggests the news flow will not be positive for semiconductor stocks i.e. Advanced Micro Devices (AMD) warned on revenues and earnings recently. Secondly, the technical picture is deteriorating quickly; a larger bearish wedge was confirmed with the breakdown below trendline support, with this week's weakness causing the 50-month moving average at 420 to be violated as well. To us, this confirmed a bear market is in place, with the next leg lower towards our 280 target level now underway.
We are currently short Lam Research (LRCX), and will look to put on short positions in both MEMC Materials (WFR) and Cymer (CYMI) in the days ahead.
