Drop in Semiconductor Stocks a Bad Omen for the Market

Given the recent concern about the uncertainty in predicting the yield curve and, with it, the likely direction of the market, investors would be better informed by looking at one measure that, since 2016, has had a high probability of predicting the direction of the overall market.

Trade tensions with China have caused shares in the semiconductor industry to drop precipitously over the past two months. There is a strong correlation between the direction of semiconductor stocks and the direction of the broader market. Chip shares often precede the S&P 500’s fall and rise. According to Dow Jones Market Data, The PHLX Semiconductor Index and the overall stock market have moved in tandem 78% of the time this year. The semiconductor group comprises 3.2% of the index. Since 2016, when semiconductor stocks started their rapid ascent, the correlation was 76%.

Some individual stocks in the sector have fared better than others. Despite a steep drop of 3% since October, Advanced Micro Device’s (NASDAQ:AMD) stock still retains its status as the best-performing stock in the S&P 500 this year, with a phenomenal gain of 108%. AMD shares have swung wildly this year, with a 52-week high of $34 and a low of $9.

Shares of other microchip makers didn’t fare as well. Micron Technology’s (NASDAQ:MU) stock tumbled 16% since the beginning of October, giving the shares a 7.8% decline for the year. Shares of Nvidia (NASDAQ:NVDA), which was swept up in the tech rout, has fallen 44% since early October.

Misery loves company, and other tech stocks have joined the semiconductor group suffering steep losses recently, based on indications of slowing revenue growth. Investors have fled the sector, pulling $2.2 billion from global tech funds for the month, according to EPFRE, a fund-flow data company. This exodus comes

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