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Rally’s Semiconductor Engine Sputters at Trader’s Narrative

The semiconductor index (SOX) is a high beta sector which can be a leading indicator of the health of the market. It found a floor in late November of last year, much earlier than the S&P 500 index. From there it continued to power ahead with consistently better relative strength:

semiconductor index SOX relative to S&P500 index Sept 2009

But in August, while the general market powered ahead, the semiconductors started to lag. That by itself wouldn’t be a major negative for the market. After all, there are naturally short periods of time when the SOX gives up leadership. What stood out at that time was that the trend line starting from November’s bottom and stretching for months and months had been broken.

I wasn’t the only one who noticed. Dave, a reader, wrote me:

I just realized yesterday that my canary-in-the-coal mines, my lead husky SOX is out-of-sync with SMH, XSD, PSI, IGW, & USD, vis-a-vis their June highs.

Again, by itself, that wouldn’t ring any alarm bells. But considering everything else that we’ve covered which paints a picture of a market dangerously overextended, this just adds to the many other reasons to be positioned for a correction.

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