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How's the economy doing? Look at semiconductor stocks.
Global sales of consumer durables and hand-held devices such as cell phones have been sliding, which is a drag on economic growth. These devices run on computer chips, which makes the semiconductor industry a bellwether for the economy.
TheStreet's Jim Cramer said he favors the semiconductor companies whose products do not go into cell phones. However, he said, reports that Apple (AAPL) -- a holding in his charitable portfolio Action Alerts PLUS -- is cutting iPhone production because of weakening demand is tarring all chip companies with the same brush.
"I wish I could take a stand" on such companies as Avago Technologies (AVGO - Get Report) and Skyworks Networks (SWKS) "but they are so inextricably linked to the fortunes of Apple that I can't risk it," Cramer said.
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From a technical standpoint, the best way to measure demand for semiconductors is by tracking the performance of the PHLX Semiconductor Index and seven of its components: Avago, Skyworks, Applied Materials (AMAT - Get Report) , Intel (INTC - Get Report) , Micron (MU - Get Report) , Qualcomm (QCOM - Get Report) and Texas Instruments (TXN) .
Must Read: As Apple Cuts iPhone Output, Should You Be Scared About the Stock's Future?
The semiconductor index, also known as the SOX, is a subset of the Nasdaq Composite (NDAQ) . It did not set a new, all-time high in 2015 but it set a multiyear high of 751.21 on June 1. Believe it or not, the March 2000 all-time high for the SOX was 1,362.10. What this implies is that the semiconductor industry has not been providing the economic stimulus most market strategists expected.
Sure, the components of the SOX are different from what they were in March 2000. But the key point is the current components could not drive the SOX anywhere near its all-time high. In the late-1990s it was Federal Reserve Chief Alan Greenspan's fear of Y2K, which influenced corporations to upgrade systems to prevent applications to misfire when clocks touched midnight entering the year 2000. This drove demand for computer chips to the moon. There are no such demand drivers today.
Let's take a look at the weekly charts. A negative weekly chart occurs when the weekly close for the market is below its key weekly moving average with weekly sentiment declining below the overbought threshold of 80.00.
The charts show the key weekly moving average in red, the 200-week simple moving average in green, and the weekly momentum reading is shown in red in the study at the bottom of the chart.
Here's the weekly chart for Applied Materials.
Courtesy of MetaStock Xenith
The weekly chart for Applied Materials shifts to negative from neutral given a weekly below its key weekly moving average of 17.98 if the weekly momentum reading declines below the overbought threshold of 80.00. The current reading is 81.0. A key level to hold is the 200-week simple moving average of 17.07, which held at Thursday's low.
The stock closed Thursday at $17.21. After declining 25.1% in 2015, it's down 7.8% after the first four days of 2016. This puts the stock in bear market territory 33.1% below its multiyear high of $25.71 set on Dec. 23, 2014.
Investors looking for short-term trades should enter a good till canceled (GTC) limit order to buy this stock if it declines to $15.85, which is a key level on technical charts until the end of January. Investors looking to reduce holdings should enter a GTC limit order to sell this stock if it rises to $23.05, which is a key level on technical charts until the end of March.
Here's the weekly chart for Avago.
Courtesy of MetaStock Xenith
The weekly chart for Avago shifts to negative from positive but overbought given a close today below its key weekly moving average of 136.52 if the weekly momentum reading declines below the overbought threshold of 80.00. The current reading is 79.33 but it was 80.70 on Wednesday. A key level to hold is the 200-week simple moving average of 70.39.
The stock closed Thursday at $129.05. After gaining 44.3% in 2015, it's down 11.1% after the first four days of 2016. This puts the stock in correction territory 14.3% below its all-time high of $150.50 set on June 1.
Investors looking for short-term trades should enter a good till canceled limit order to buy this stock if it declines to $122.44, which is a key level on technical charts until the end of 2016. Investors looking to reduce holdings should enter a GTC limit order to sell this stock if it rises to $138.63, which is a key level on technical charts until the end of June.
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