Strongly trending markets don’t care about P/E ratios, inverted yield curves, the Presidents latest tweet or most everything else for that matter. Which is why it pays to watch price movement only and put everything else on "ignore". The semiconductor index, SMH, has always been my canary in the coal mine. It tends to lead stocks both up and down which is why it is a critical reticle into the US stock market and investors willingness towards risk. If its price is in an uptrend, risk is on and investors should be long stocks, very long. Of course, the opposite is also true. With that in mind let’s take a look at a price of SMH and see what it may be telling us.
After falling, like the rest of the market to its Dec 24th lows, price rallied impulsively higher, with only a few small, minor pullbacks before testing the prior high (resistance/overhead supply) made in June of last year (red horizontal line). After pulling back 4 days, price resumed its move higher eventually gapping above that prior level of resistance on high volume (~40% greater than average daily volume). The gap was the first sign and when confirmed with high volume let us know institutions (almost $1B traded on that breakout day) were buying. I don’t need to repeat it but higher probability profitable investments come in the direction of the current trend and when institutions are accumulating. Both of which the current chart of SMH is signaling. For those already in this ETF, the good news is you now have a very clear, simple and well-defined exit plan. If price in the short term cannot hold above the recent breakout, that would be an ominously bearish signal warning it’s time to take profits and watch from the sidelines.
Sure, the market is richly valued, sure it is overbought on virtually every level but the semis are telling us buyers are in control. Don’t fight the trend.