Hanging by a Chip

US equities are trying to prove themselves after several weeks of selling pressure. Buyers are stepping in and repairing some of the recent damage.

When I think of the group of stocks that will determine whether the bulls regain control or not, I can’t help but think of semiconductors.

They are quite literally the lifeblood of the world economy, carrying significant weight in major indexes across a variety of global markets.

The Equal Weight Semiconductors ETF $XSD is a great way to get a true read on the group.

When we look at it on a relative basis, it’s been carving out a massive top against the S&P 500.

Right now, the ratio sits near its lower bounds—neither breaking down nor catching a bid higher. 

We’re just hanging in there.

How this resolves will shape our positioning in the weeks ahead.

A breakout higher would signal rotation back into U.S. equities and growth stocks, and is likely to happen alongside a broad market rally.

But if this top completes, semis are likely to roll over on absolute terms as well. 

Under this scenario, stocks remain under pressure and we probably experience a steeper and longer correction than the one we’re looking at now.

Alfonso