The Semiconductor Selloff Could Be About To Get Much Worse

It looked like a rough day for stocks, with the S&P 500 down more than 1% and the Nasdaq down almost 3%. However, the RSP, the equal-weight S&P 500 ETF, was up more than 70 basis points. This ties back to what we discussed a week or two ago about a potential rotation in the market, given the triple-top pattern forming in the SPY-to-RSP ratio. So far, the pattern hasn’t fully played out, and I’m guessing we could see the ratio move even lower.

The SMH was down sharply and is nearing its July lows, which appear to be an important support level. If that level breaks, I could imagine it creating a bigger problem for the entire market, given how momentum-driven it has been.

The KOSPI shows this a bit better, and to be fair, it has been an excellent leading indicator for the SMH. So tonight may very well determine whether or not the sector breaks down. The KOSPI chart looks really bad, and I would not be surprised at all if it fell further.

The Bank of Korea held rates steady at its last meeting but indicated that further rate hikes remain possible, with markets still expecting an increase by December. USD/KRW continues to decline, and it still looks like a currency pair with further room to fall. It may be getting closer to an area where it could pause, but I don’t think the move is over yet.

I had thought a cup-and-handle pattern was forming in the USD/JPY, but so much for that. It hasn’t worked out so far, and one has to wonder what a failed bullish continuation pattern means here. It looks like a genuine breakdown, too, and if USD/JPY doesn’t quickly recover above the handle’s lower boundary, we could see the pair fall toward 155.

There’s plenty more to cover today, but with the day drawing to a close, I’ll leave the remaining analysis for tomorrow.

-Mike

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Glossary by ChatGPT

Basis Point: A unit equal to one-hundredth of a percentage point, commonly used to measure changes in interest rates, yields, and investment returns.

Cup-and-Handle Pattern: A technical chart formation consisting of a rounded price recovery followed by a smaller consolidation, typically interpreted as a bullish continuation pattern.

Equal-Weighted S&P 500: A version of the S&P 500 Index that assigns equal weight to each constituent rather than weighting companies by market capitalization.

KOSPI: The Korea Composite Stock Price Index, South Korea’s primary equity market benchmark.

Market Rotation: A shift in investor capital and market leadership from one group of stocks, sectors, or asset classes to another.

Relative Strength Index (RSI): A momentum indicator measuring the speed and magnitude of price changes on a scale of 0 to 100.

RSP: The Invesco S&P 500 Equal Weight ETF, which provides equal-weighted exposure to companies in the S&P 500 Index.

SMH: The VanEck Semiconductor ETF, which provides exposure to major semiconductor companies.

SPY: The SPDR S&P 500 ETF Trust, which tracks the market-capitalization-weighted S&P 500 Index.

SPY-to-RSP Ratio: A relative performance measure comparing the market-cap-weighted S&P 500 with its equal-weighted counterpart, often used to assess market concentration and leadership.

Triple-Top Pattern: A bearish technical reversal formation characterized by three peaks near the same resistance level, with confirmation typically occurring after a break below support.

USD/JPY: The exchange rate representing the number of Japanese yen required to purchase one US dollar, with a decline indicating yen appreciation.

USD/KRW: The exchange rate representing the number of South Korean won required to purchase one US dollar, with a decline indicating won appreciation.

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