The Semiconductor Selloff May Be About To Accelerate

Markets were fairly boring again today, with little happening on the surface but plenty happening beneath. The RSP outperformed the SPY, pushing the SPY-to-RSP ratio lower. This suggests market leadership is shifting away from the mega-cap technology stocks that have driven much of the market’s gains toward a broader group of stocks. If this trend continues, the equal-weighted S&P 500 could outperform the tech-heavy SPY.

The SMH remains at a critical level, with support around $540 having held firm for some time. A break below that level could trigger a sharper decline and open the door to a retest of the July lows near $510.

That makes sense, given that credit default swap spreads continue to widen for semiconductor companies, with Nvidia, AMD, and Broadcom widening further today. Typically, widening CDS spreads signal rising credit risk, which tends to put downward pressure on stock prices. That relationship has largely played out for Broadcom, but less so for AMD and Nvidia, although both stocks have recently started to weaken as well.

The 2-year Treasury yield appeared to be forming a bull flag ahead of the CPI report and briefly broke out before giving back the entire move. Now, the pattern appears to be taking shape again. This time, any breakout would need to hold. If it does, I think we could see the 2-year yield rise to 5% or higher.

Maybe tomorrow will be interesting.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Glossary by ChatGPT

Bull Flag: A bullish technical chart pattern characterised by a sharp advance followed by a period of consolidation, potentially signalling continuation of the prior uptrend.

Credit Default Swap (CDS): A derivative contract that provides protection against a borrower’s default, with its spread reflecting the market’s assessment of credit risk.

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 capitalisation.

Market Breadth: A measure of how widely market gains or losses are distributed across individual securities.

Relative Strength Index (RSI): A technical momentum indicator measuring the speed and magnitude of price movements 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-capitalisation-weighted S&P 500 Index.

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

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