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Following is the opening segment of this week’s edition of Notes From the Rabbit Hole, NFTRH 504. For months now we have been tracking a divergence in the key cyclical Semiconductor Equipment segment (I am short AMAT & LRCX) to the broader Semi sector (ref. the most recent article from May 18th here) and this week we put more context to the divergence.
A Bull in a China Shop
In light of the developing trade war between the US and China, let’s review the all-important Semiconductor sector and in particular, the Semi Equipment segment, which is a key economic early bird (and canary in a coal mine).
Various sectors took hits on Friday as Trump moved forward with Tariffs on China. But most of those sectors and industries are follow-on aspects of the economic cycle, which got its start when the early bird chirped in early 2013.
With China in Trump’s crosshairs and China a very key player in Semi Fab Equipment, there is a fundamental reason that the Equipment companies are faltering. From SEMI by way of a post at nftrh.com in March.
“SEMI predicts Samsung will lead the pack in fab equipment spending in both 2018 and 2019, even though it will invest less each year than in 2017. By contrast, China will dramatically increase its year-over-year (YOY) fab equipment spending for the next two years – by 57 percent in 2018 and 60 percent in 2019 – to support fab projects from both overseas and domestic companies. The China spending surge will thrust it past Korea as the top spending region in 2019.” (more…)
The health care sector ETF, shown below, peaked early this year and has been downtrending ever since. In particular, it has made three unsuccessful attempts to push back resistance, represented by the magenta line I’ve drawn.
In light of earnings reactions in the Semiconductor Equipment sector, it’s time for an update of a theme we have had in play since November, 2017
The canary is no longer chirping in a healthy manner and the economy’s coal mine has a toxic gas leak. While the recent Lam Research (LRCX) earnings report was pretty good and there were positive aspects to that of Applied Materials (AMAT), these highly cyclical companies that have been at the front end of the entire economic cycle that had its beginnings in 2013 are showing signs of wear.
Business is still good but when you are talking about cyclical leaders, it is growth rate that matters. I have read article after article touting strong current business and future drivers that will change the typical Semiconductor cycle as next generation Fabs are needed for ever more dynamic specialty chips for higher-end devices.
Applied Materials Slides After Softer Q3 Forecasts on Weaker Smartphone Demand
“Smartphone sales have been below expectations, particularly for high-end models, and in response, both semiconductor and display suppliers have made adjustments to their capacity planning,” CEO Gary Dickerson told investors on a conference call. “With inventory rebalance that we’re seeing from smartphones, we’re going to see a sequential dip in the Q3. But from our guidance into Q4, you can see that it recovers nicely into Q4.”
Yesterday we took a look at the bullish SYK breakout and the bullish chart of the Medical Device iShares (IHI). So here is the thing; bullish stocks are one thing and sound business is another. Many of these device/equipment companies have long-standing and sound businesses.
But yet another thing is valuation. In combing through IHI’s holdings today, looking at charts, business specifics and P/E & P/S I am struck by how over valued and over played the sector is by the suits, who evidently have read my many assertions that the sector is stable during economic soft patches. Just kidding, but… Wall Street loves themselves some medical device companies these days. IHI’s holdings… (more…)
The Russell 2000 Index (RUT) is holding closer to its January all-time highs, compared with the Dow 30, S&P 500 and Nasdaq 100 Indices, as shown on the following daily charts.
Its momentum indicator remains the strongest, of late, and is above the zero level, as are the others.