By J.C. Parets & All Star Charts
Friday, 26th May, 2023
1/ It’s Not a Party Without the Chips
2/ Time for Software to Break Out
3/ Big Levels for Laggards
4/ Gold Bugs Search for Support
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1/ It’s Not a Party Without the Chips
Semiconductor stocks and indexes are closing the books on their best performance in back-to-back weeks since the dotcom bubble. On a relative basis, yesterday marked the widest outperformance gap versus the broader market since the early 2000s. These stocks are all the craze right now, and for good reason.
To illustrate this strength, here is the VanEck Semiconductor ETF (SMH) breaking out to new all-time highs relative to the S&P 500 (SPY):
We don’t think it is any coincidence that this subgroup is experiencing momentum thrusts on both absolute and relative terms just as it is eclipsing its dotcom bubble highs versus the broader market.
Multi-decade breakouts like this one are typically followed by aggressive reactions higher as price follows through on the pattern resolution. Therefore, semiconductors could be kicking off a new period of sustained leadership.
As long as SMH/SPY holds above these former highs, we could see more leadership from the sector. These companies are the lifeblood of the modern day economy.
2/ Time for Software to Break Out
With the technology sector exploding higher this week, it was about time for software stocks to join our list of completed bullish reversal patterns.
Here’s a look at the daily chart of the Expanded Tech-Software Sector ETF (IGV):
After a year of carving out a rounding bottom formation, the price soared 2.34% today, piercing above a critical resistance level that coincides with the 38.2% Fibonacci retracement of the most recent drawdown. This very same level also represents the August highs.
Not only is IGV reaching fresh 52-week highs, but an upward-sloping 200-day moving average and momentum getting overbought add conviction to the breakout.
Other tech-related groups could follow the path of software or semiconductors in the coming days and weeks to reinforce the notion that a new leg higher for the entire growth complex is underway.
3/ Big Levels for Laggards
Despite all the bullish developments of the past few weeks, we always want to play devil’s advocate. When we think about any potential bearish thesis these days, it all comes down to value and cyclical groups.
While this means things like energy, materials, and industrials, it also means financials. When it comes to the major averages, the large-cap indexes like the S&P and the Nasdaq have a tilt toward growth. However, the small-cap Russell 2000 (IWM) has a tilt toward value. For this reason, the stock chart resembles the large-cap Financial Sector SPDR (XLF).
Here are both charts, zoomed out to the prior cycle highs:
As long as the 2018 highs hold in these indexes, the primary trends remain intact. And the longer these key levels hold, the more likely it is that these underperforming groups eventually play catch-up to tech stocks and other leaders.
Considering all the bullish data points we’re getting from other areas of the market, these stocks may soon get their act together and begin trending higher as well. But it would need to happen ASAP, as these indexes and others are vulnerable at current levels.
4/ Gold Bugs Search for Support
Gold futures have sliced through near-term support, careening toward a level etched in the minds of gold bugs everywhere.
We’re talking about the 2011 highs!
Check out the weekly chart of gold, highlighting those former 2011 highs that marked the prior commodity supercycle peak at roughly $1,924:
Few investors traded at that level in 2011 due to the blow-off top. We imagine that many wished they had, as those former highs have seen plenty of action over the past two years—mainly as resistance.
Gold futures reclaimed this all-important level in mid-March, setting the course for new all-time highs. But now, as it pulls back, will this former resistance level act as support?
If it doesn’t, a much deeper correction could lie ahead for precious metals.
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Originally posted 26th May 2023
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