A market downturn could be on the way, and investors need look no further than semiconductors for a hint as to why.
That’s what Dan Russo, a technical analyst at Needham, sees in the charts. According to Russo, there is a “clear, positive” correlation between the semiconductor space and the S&P 500. In fact, the correlation is close to 80 percent, says Russo, pointing out that the semis and S&P 500 have moved virtually in lockstep over the last two years as semis and the market have rallied.
But that close correlation is also hinting at a downturn, as of late. Looking at a chart of the semiconductor index, SOX, Russo explains that while semis are up almost 8 percent year to date, the group is actually weakening.
“You can see (that last week, the SOX broke below its) 50-day moving average,” he said Tuesday on CNBC’s “Trading Nation.” “But what might not be clear is (that in the SOX,) only 43 percent of the constituents are trading above their respective 50-day moving averages, and that’s down from about 80 percent in March.”
The trend wouldn’t be so troubling, except that it has also repeated itself in the S&P 500. The index also fell below its 50-day moving average last week, and a “breadth deterioration” has taken place in the S&P as well.
“We’re currently only seeing 48 percent of the constituents are trading above their respective 50-day moving averages, that’s down from 78 percent in February,” said Russo.
And given that the semis and the S&P 500 have a high correlation with one another, trouble could come for the market should the semis fall. Russo actually believes that a “shallow pullback” looks like it could occur in the SOX.
“I think there is a fairly likely scenario that we trade down to that $905 level sometime in the next one to two months,” he said.
That would be a 7 percent drop in the SOX index. If that were to occur, Russo sees the S&P 500 pulling back to 2,260, just under a 4 percent drop from the index’s Tuesday close.