Andrew,
How are you? I hope your letter is doing well. The best thing on the market for the price. I continue to benefit from it immensely. Thank you.
Here is a post from a lady who seems very knowledgeable, and I would like your opinion , and the opinion of the other very informed members on this thread , about the contents.
Best Wishes
Prasanna
From: Ms. X Friday, Jul 23 1999 11:33AM ET
Reply # of 22647
SOME OBSERVATIONS ON THE SEMICONDUCTOR INDEX (SOX)
printed with permission from DWA
On Wednesday (7/14) we received a very interesting fax on the Semiconductor Index (SOX). Today we want to share some of the points of that fax with you. The key points made by Wing Chow, an equity research analyst at Bear Stearns, were as follows (he included a 5 year bar chart to depict his points):
Semiconductors have had a regular cycle the last five years. The Cycle is very basic, one year up followed by one year down. The Up Cycle runs up over 160% (gain in the SOX), while the down Cycle runs down -50%. The Cycle seems to reverse midsummer. The middle of July seems to be the beginning of a consolidation phase.
The bottoms in the SOX on his chart were:
July 21, 1994
July 16, 1996
September 1, 1998
The tops in the SOX on his chart were:
September 12, 1995
August 21, 1997
????, 1999
Notice that the bottoms are made in the even years and the top are made in the odd years. We are in an odd year.
The gains from trough to peak:
1994 to 1995 = 163.4% (13 1-2 months)
1996 to 1997 = 191.8% (12 1-2 months)
1998 to 1999 = So far, up 177.5% (10 1-2 months)
The losses from peak to trough:
1995 to 1996 = - 54.3% (10 months)
1997 to 1998 = - 53.1% (11 1-2 months)
So what does all this mean going forward? Well, based on this history laid out above, the SOX could well be close to a top.
That top though remains to be seen so far, as the SOX moved to new all time highs yesterday. So we will not venture to call a "Top" in the SOX just yet. We will instead defer to our main sector indicators.
As you know, the main tools we use in determining the status and outlook for a sector are the Sector Bullish Percent charts, and the Index trend charts and their Index Relative Strength charts. In the case of the Semiconductors, we use the Semiconductor Bullish Percent chart and the Semiconductor Index (SOX) to guide us.
These charts have been very helpful in assessing both opportunity and risk in the Semiconductor stocks. In looking back at the Semiconductor Bullish Percent, in 1995 this group was up at lofty levels of 88% on its bullish percent chart by July of that year. That rise to 88% paralleled great rises in many of the member stocks during the second half of 1994 and the first half of 1995. But then the Semiconductor Bullish Percent reversed down to give a sell signal from what you know is a very high risk level. Though it was a tough call to make to our clients, we went bearish on the group - this was at about the same time that Micron Tech (MU) was trading at $95, and thought by Wall St. analysts to be on its way to $200. We instead said to take profits or hedge positions as the stock started to breakdown along with other Semiconductor stocks. MU fell steadily to $17.
In the summer of 1996, the Semiconductor Bullish Percent bottomed out at the very washed out level of 12%, then reversed up in July of 1996 to give us a strong buy signal for the group.
Are you seeing the parallels to Wing Chow's statements? This pattern of extremes reached by the Semiconductor bullish percent continued, and matched pretty well with the "cycles" mentioned above.
In July of 1997 the group reached a lofty level of 78% on its bullish percent chart, the highest level it had been since mid 1995. Again, a sell signal was given on the reversal down, and this suggested defense in the Semiconductor stocks. Besides a brief bounce up in early 1998 (that lasted only about a month or so), the Semiconductor group waned in 1998, until reaching a September 1998 low of 6% on its sector bullish percent reading. This was the lowest the group had ever been.
Needless to say, the reversal up from that "green" zone was a major buy signal. Now to the present. This group now resides up at very lofty levels again, having reached a recent high of 86%, the highest the sector had been since mid 1995.
We have since seen a reversal down into O's, a negative sign. We do want to mention that this is the first chink in the armor for the sector. Now we must say that our internal daily calculations on the sector bullish percent show the Semis having risen the past couple of days with the spate of recent buy signals seen. This might well be enough to reverse the group back up into X's. But realize that all this does is set up the potential for a Bear Confirmed reading at high levels should the group then reverse back down and break a bottom.
That's thinking a couple of moves ahead, but you get the idea - the sector is up at what's considered a high risk level. It will be very important to watch this group's bullish percent, and given the fact that we are currently in O's, we would suggest that you temper your enthusiasm on the group and watch the trend charts very closely on
Semiconductor stocks you may own. Don't be shy about taking partial profits if you are up substantially. Remember, we use the general rule of thumb that you sell a third of your position if up 30%, sell another third if up 50%. Then you can keep the last third to half of a position until the trend chart of the stock tells you otherwise.
Besides needing to watch the Semiconductor Bullish Percent closely, we would also recommend that you keep a close eye on the Relative Strength chart of the SOX. It has been very useful in determining when strength is present for the group, or if it's dissipating. The RS chart for the SOX is shown below, and we have marked the chart where reversals have occurred in conjunction with trend changes for the group. So at this point, the RS chart for the SOX remains on a buy signal and in X's; the sign of trouble would be a reversal down into O's on the RS chart.
There are other indicators we keep on each group that you might find useful, such as a 10 Week MA on the Semiconductor sector, the percent of stocks in an uptrend, and so forth. We suggest you take a look at these other indicators. They can be found on our Internet site under DWA Technical Indicator Report (which is under the bottom-left quadrant)(box seats).
So in summary, be at a heightened state of readiness with respect to this sector. We are not saying that the play is necessarily over (yet), but history suggests a top, and more importantly, the sector bullish percent for the group suggests a high risk situation.
As always, we will follow our indicators; the Semiconductor Bullish Percent has been very useful in the past, along with the SOX trend chart and RS chart, so we will continue to rely on those tools, as you should. Bottom line -- stay on your toes, that's all. Below are some charts you may find useful.
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