Semiconductors are arguably the most important group of stocks in the market.
They’re so important that we like to include them as part of the conversation about Dow Theory confirmations.
Going back to the late 1800s, Charlie Dow was a journalist in Springfield, Massachusetts.
He’d knock on doors and the business owners would tell Charlie, “Our business is none of your business.”
So, in order to get a better gauge of the market environment, he was forced to create a basket of stocks that defined whether it was a good time or a bad time.
He called them “bull markets” and “bear markets.”
One group of stocks was the “Industrials,” the companies that made the goods.
The other group was the “Railroads,” the companies that delivered those goods.
When both baskets of stocks are going up and making new highs, it’s a bull market.
When both are going down, it’s a bear market.
When one is falling while the other is rising, the divergence is evidence of a change in trend.
That original Industrial Average is known today as the Dow Jones Industrial Average, and it Includes 30 companies.
The old Railroad Average is what we know today as the Dow Jones Transportation Average.
These days, we have more methods of delivery beyond the rails.
The Transports consist of 20 companies, including shippers, airlines and truckers as well as Uber Technologies (UBER).
How Things Move Today
I’ve hung out with other traders at bars and in other social settings many, many times over the years.
A lot of the best traders consider the Philadelphia Semiconductor Sector Index (SOX) the new “transportation” index.
In this age, goods and services are delivered over computers, not railroads.
The VanEck Semiconductor ETF (SMH) was flirting with a major top this year.
But, as we’ve seen many times throughout history, in the strongest uptrends these groups get everyone super-bearish…
Only to rip in the bears’ faces and continue their longer-term uptrends:
When a company such as Nvidia (NVDA) reports it’s fair to call it the most or at least one of the most important days on the earnings calendar:
That’s the granddaddy of them all right now.
NVDA and SOX
After Nvidia reported earnings, the stock was up more than 6%.
That’s an increase of over $200 billion in valuation, in a matter of minutes.
NVDA was already worth $3.3 trillion. And now it’s a lot more.
You can’t have any technology without chips. And this is the biggest chipmaker.
So, if you’re curious about how your tech stocks are going to fair in the coming months and quarters, all eyes need to be on NVDA and SOX.
Sector rotation is the lifeblood of a bull market.
Further rotation back into semis specifically and tech generally would be consistent with what I think is the next leg of this bull market.
Are you ready?
Stay sharp,
JC Parets, CMT
Founder, TrendLabs