Tuesday, April 24, 2007

Counting the Chips in Semiconductors

I recently posted a look at ETFs that showed that small cap stocks are outpacing large caps and growth has been trumping value. Among the possible beneficiaries of this trend are the semiconductor stocks, as noted with my earlier post on INTC.

In the chart above, I've gone back to 2006 and tracked the semiconductor ETF (SMH; blue line) vs. the relative dollar volume flow indicator (pink line) for five top-weighted stocks within SMH: TXN, INTC, AMAT, ADI, and MXIM. Recall that the zero level for relative dollar volume flow represents that level of inflows equal to the 200 day moving average for those stocks. When we see positive values, that means that the sector is enjoying above average sector inflows.

Note that, even with the sharp selloff of late February/early March, we never saw relative money flows for the sector decline to below average. Since that time, we've seen higher highs and higher lows in money flow, with a consistent positive bias. The price of SMH of late has responded to this trend of inflows, breaking out of a consolidation area that goes back to the fourth quarter of 2006.

The ability of semiconductor stocks to maintain inflows during a market decline; a rise in inflows following the decline; a price breakout from a long-term range; a shift in investment themes toward growth: It does appear that someone is putting their chips on the semis.


F. said...

A change in leadership is associated with market topping. If large cap value begins to put in lower lows, I'd be weary of the rally's ability to continue. Of course, until then, ride the tide up.

Brett Steenbarger, Ph.D. said...

Hi F,

I agree with you, but in a more limited context. Topping in bull markets tends to be a movement away from smaller caps and growth toward larger caps and more defensive issues. That happened in spades during the 2000-2001 topping. What we're seeing now is the reverse, with expanding money flows into stocks.


F. said...

Large caps already saw big moneyflows and growth suffered since last summer. Many of your fine posts on this blog questioned the quality of the Fall run-up in stocks because breadth did not lead. Was that a top?

In fact, the summer correction of '06 was preceded by weeks of Nasdaq (the former leaders) underperformance as the Dow put in new highs. The past 9-10 months have seen value lead and I would venture to say if value begins to lag, this might reflect longer term distribution by the big players who have powered the most recent bullish primary leg, even if breadth attributed to growth stocks expands.

Brett Steenbarger, Ph.D. said...

Hi F.,

I think you're right; institutions have been distributing those value funds, putting them to work in other sectors. Should we see an overall decrease of money flows into equities--similar to what we saw in the March-May, 2006 period--I'd expect a meaningful correction. At this juncture, I don't see such a withdrawal of funds. I see enhanced money flows, with a shift toward growth.