I first wrote about the PHLX Semiconductor comeback in 2008 in The Other Commodity post, when the SOX was all but forgotten, staggering around the global market, lost, since 2000, while the great commodity bull market of the new century was literally rising from the earths crust with buildings as tall and as high as we have seen - and it was happening fast. But again, the SOX was lost, meandering in over-capacity, falling prices, decreasing margins - you know, the usual suspects. Then the financial crisis took shape and commodities cracked, and so did the SOX, further falling, and aiming for levels not seen since 2003 and 1998 - it was a here we are again moment. And that was it, the same moment that made you feel like you had been there before was the same moment that would never be seen again.
And two years later, the SOX has climbed from 175(a 10yr low) to 400, a whopping 128%, while the CRB Index only rose 62.5%, going from 200 to a high of 320 early November. Now, while I believe the CRB can outperform medium to long term, now is the time to start thinking about entry strategies to get back into semi-stocks. I still believe we are in the midst of a secular shift in this sector - the premise being that Semiconductors are today where commodities were in 2003-2004, according to Elliot Wave. Look at the CRB below and what its WAVE 1 and WAVE 2 looked liked.
CRB Index - Emergence of the Bull.
Here is the SOX index, which is in a WAVE 2 correction, and entering a WAVE 3 - the longest wave of Elliott Wave theory.
SOX Index - Emergence of a Bull.
What are the factors driving the SOX?
Well, inflation is one of them(lower dollar), along with a consolidation in manufacturing and outright bankruptcies during the global crisis. Add that to demand globally, as the middle class continues to surface in emerging markets, which compensates the overcapacity issues, and there is a solid case for continued demand for electronics, and also alternative energies and its consumption of semiconductors. As the DRAM prices have stabilized over the past 2 years, we can see on the DRAM Exchange, that prices have retreated in the last couple of months, but have been on a rapid rise over the course of two years, bouncing hard off its 2008 historical lows. With the recent pullback in DRAM and FLASH prices, I believe that now is the time to start looking at semi-stocks again for the Long-Term - buy and forget about them mentality. You don't buy Semi stocks when DRAM/Flash drive prices are high, you buy them when they are low. I would start aggressively accumulating Semi-Stocks over the course of 1-3 months. According to the Elliot Wave Theory, the Wave 2 selling could be coming to an end.
I was bullish on Semi land up until Jan/February of 10, when I called for a 15%-25% correction in the blog posting Watching The Leaders For A Shift. It was also this time I grew a bit bearish on the market because Semiconductors are part of the leaders in the business cycle. I was then implementing a long late cycle/short early cycle stance for hedged protection in the The Exit Strategy post and so far the strategy has worked, as we have seen late cycle commodities moving higher while semis/banks have been lackluster, with downward pressure - and that why its time to get back to Semi land, searching for entry points.
Below is a chart of MU and an Elliot Wave analysis for re-entry into that stock - overall I would be patient and wait for strategic entries back into semi-conductors, but this is where the value could be hiding, and possibly even creating superior returns to commodities for the long-term. Knowing Semi's may be in the beginning of a secular bull market, a new hedge could emerge in using Gold as a short hedge. This though would require a bit more research, as for now the Gold bull is alive and well, and juniors still present undervalued opportunities. So for the long haul, we could be setting ourselves up for a Short Gold/Long Semi strategy, at some point, but I'm not about to go there just yet.
I will also include a Mean Reversion charting technique I use to give myself another form of methodology of where/when to enter into a position.
Why Semis? And why MU - besides the fact I like the way it trades and its large liquidity, it is easily to identify its pullbacks due to its very simplistic elliott wave formation. But also, as the dollar falls, our semiconductor products and pricing become more attractive, globally. As the dollar continues to fall, or even if it stabilizes, it will be a large factor in its global competitiveness. And in the end, Semiconductors are - The Other Commodity - and remember commodities make roads and buildings - chips make everything else.
SOX COMPONENTS
ALTR,AMD,ATHR,BRCM,CREE,CRUS,HITT,INTC,KLAC,LLTC,LRCX,SNDK,STM,TER,TXN,VECO,NVDA,MU,NSM,POWI,RBCN,STM.
