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The S&P 500 finished the day flat, while the Nasdaq gained around 80 bps. It is hard to say that today was much different from what we have seen in recent weeks.
One thing that stands out regarding the $SMH is that USD/KRW had been rising over the past few days before taking a leg lower today. At the very least, the relationship between the two still seems intact, although it may operate with a lag. If USD/KRW begins to fall again in the days ahead, then the recent rally in the SMH could begin to fade.
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The correlation between USD/KRW and the SMH has been strengthening since 2023, with the current regime lasting longer and showing a stronger relationship than the brief periods seen in the past. This would suggest that if USD/KRW continues to strengthen (fall) from here—and we certainly can’t rule that out—it could have important implications for the semiconductor sector.
Another notable aspect of the recent rally in semiconductors is that CDS spreads for Nvidia, AMD, and Broadcom have been widening. We have seen this divergence before, and if I remember correctly, the previous rally in semis did not last.
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Credit Spreads May Be About To Widen
Generally, the relationship between a stock and its CDS is inverse, as we would expect growing concerns about credit risk to weigh on equity valuations and drive the stock price lower. But clearly, these are not normal times, especially in a market where options trading is off the charts.
AMD, for example, has seen an explosion in net call volume over the past few days, which is probably behind the stock’s recent move higher.
-Mike
Glossary by ChatGPT
Basis Point (bp) — One-hundredth of one percentage point, commonly used to express changes in rates, yields, spreads, or market performance.
CDS Spread — The premium paid for credit default swap protection, with wider spreads generally indicating greater perceived credit risk.
Correlation — A statistical measure of the strength and direction of the relationship between two variables.
Net Call Volume — Call-option trading volume after accounting for offsetting activity, used to gauge the directional intensity of call demand.
Regime — A sustained market environment in which particular relationships, trends, or behaviors persist.
SMH — The VanEck Semiconductor ETF, an exchange-traded fund providing exposure to major semiconductor companies.
USD/KRW — The exchange rate measuring the number of South Korean won required to purchase one U.S. dollar.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.