We find it comical that some pundits think that since a couple of Fed members have come out to say that the Fed is unlikely to cut back on their QE program any time soon, it means that we should totally ignore the other Fed members who have been talking about tapering back on QE if the vaccines help unlock the economy. THIS is how the Fed changes their stance!!! They get a few Fed members to talk about a change...while a few others say that nothing is going to change for the foreseeable future!
This is the lesson the learned in May of 2013 when the big “taper tantrum” took place. They quickly had to pull-back on their initial statements about “tapering”...and they spent the rest of that summer going back and fourth...with some members saying that they might taper...while others said it was unlikely that they’d taper. Most of them said it was “data dependent” and that if the data improved then they would indeed taper. Well, the data didn’t improve at all that summer...but they still tapered in the fall. Why? Because interest rates were WAY below what they should have been given the underlying economic data...and they realized that they needed to “normalize” rates back up to the level that was justified by the economic growth of the time. They were always going to taper. However, they felt that they had to do it in a way that would not create another tantrum...so they went back and fourth in their public comments until they did what they knew they were always going to do: taper. (That strategy worked out quite well. They were brilliantly about to adjust from the initial mistake they made in May of 2013.)
We believe that the are following the exact same strategy this time around as well. The Fed realizes that the economy is about to become unlocked...even if it’s going to take a long while to get back to the pre-pandemic levels. Therefore, the Fed also realizes that the system will not need anywhere near as much stimulus as it needed when it was pretty much completely locked-down. (We believe that they also realize that if they keep the pedal to the metal, they will create the kind of bubble in stocks that will become very, very dangerous.)
Therefore, we believe they are going to taper back on their QE program. They’ll begin by doing gradually (like they did over the summer last year when the first wave of the pandemic subsided for a while). Then they’ll do it officially...with an announcement. While they are going through this process, Fed officials will make public comments...going back and fourth about whether or not they’re actually going to taper any time soon...even though they’ll know all along that they will indeed taper sooner than the market is pricing-in right now.
If anybody thinks that President Bostic and President Evans made those comments last week without Chairman Powell knowing they were going to make these comments...they’re out of their minds. Those comments were well thought-out...and they put in the public arena in a very purposeful manner. It told us that they’ve decided to taper back on their QE program if the vaccines do indeed lead to an unlocking of the economy. (It is also....definitely...the responsible thing to do.)........So don’t listen to the pundits who are trying to say that the contradicting comments from some other Fed officials means that the existing QE program is going to last for very long time...and that the Fed will allow another stock market bubble to inflate itself.
Anyway, we have been very bullish on the semiconductor stocks since last spring. We doubled-down on that call in October...saying that investors should rotate “within” the tech sector...by moving away from the mega-cap tech names...and towards the chips (and cloud computing names).
We still like the chip stocks on an intermediate and long-term basis, but they are now getting quite overbought on a short-term basis. Therefore, we’re going to add this group to the two other groups we’ve been highlighting recently (the banks & the energy names) that could/should be due for a “breather” over the near-term. Again, we still like these groups very much...but we think investors should avoid chasing them at these levels...and instead look for a pull-back to get more aggressive once again.
Due to the fact that the SMH semiconductor ETF was not initiated until 2021, we’re going to use the SOX semiconductor index in our technical analysis today. The SOX and the SMH both trade in tandem, but since the SOX goes back further...and our analysis goes back to the tech bubble...we thought it would be the better one to use this time around.
INTC saw a strong 7% rally yesterday in response to the change at CEO for the company. So we finally got some good news for one of the very few chip stocks underperformed the broad market in 2020. (It actually more than just “underperformed”....it fell 15% last year.) However, we have to point out that the SOX semiconductor index is becoming quite overbought on an intermediate-term basis (based on its weekly RSI), so investors will want to be a little bit careful about chasing this group after its fabulous rally since last March.
Again, this has been a group we have been very bullish on...especially since late September/early October...and we think it should have a good full year this year. However, we’re just thinking that it’s getting ripe for a “breather”...and thus investors and traders alike should be careful about being aggressive on the long side right now.
The weekly RSI chart on the SOX has reached a reading of 77...and it has only been more overbought on one occasion since the top of the tech bubble 20 years ago! It HAS been equally overbought...reaching the 76-78 range on seven other occasions...but each of those occasions has been followed by a decline of an average of 14%.
We don’t want to make too much of the potential decline in the chip stocks. Even though we have seen drops of 37% and 24% on two occasions when the SOX got as extended as it is now, it has also seen drops that were only in the single digits...including one of just 2%. (We’d also note that the ONE time the SOX reached an even more overbought condition...in late 2017...it was followed by a drop of “only” 8%.) So just because the group has become overbought on an intermediate-term basis does not mean its about to fall out of bed.
However, we’d also note that the SOX is now trading at a premium of almost 100% to its 200 week moving average. That is a much, much higher premium than any other time since the tech bubble 20 years ago...so the odds that they see at least some sort of pull-back over the coming week are getting quite high.
Then again, the SOX did reach a premium of a whopping 275% back in 2000, so we guess anything is possible. That said, these readings show that the chip group is another situation where investors might want become a little less aggressive right now on some of the sectors that have outperformed over the past 3 or 4 months...at least until they have taken a bit of a short-term “breather.”
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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