Take a deep breadth and relax. The market had run away from itself with the semis at the vanguard of the bubble. You were warned about this and chose not to do anything about it.
Let’s first examine the root of the carnage, the semiconductor index. We are down 3% on the $SMH, now off by 15% in the past two weeks. How is the valuation now?
Let’s examine:
Industry/P/S last year/P/S this year
Semi specialty 4.45/6.11
Semi memory 3.07/3.89
Semi Equipment 4.83/4.8
Semi integrated 2.18/2.38
Semi broadline 3.79/5.92
Clearly we are still overvalued. It doesn’t help when companies like $TER disappoint and plunge lower after it had already corrected. We have a sense of dread in the tape. Just so you know, in order to get to where the price to sales were last year, we’d need to drop about another 25 to 30% from today’s prices.
Is all lost, can we recover?
Yes, and of course. Today’s action is what I call a ‘flush out’ or capitulation. It started nice and then panic occurred and all hell broke loose. We went from up to down nearly 300 NASDAQs in an hour, likely due to margin selling. This is what happens when the bulls get hooked. This is also what happens when you’re over concentrated in one sector.
Treasuries are rallying because safety, which is good for the economy. The lower the rates the better. We are down 7bps to 4.22% now. It’s also worth noting the small caps are UP, indicative of several things, chiefly that Trump will win the election. The larger cap tech and globalists stocks are down heavily, while the regional banks are +1.5% and the $IWM +1.3%. This is not a fluke and not by accident. This is what rotation looks like.
What’s the plan?
I have a well constructed balanced portfolio. I am flat for the session, so I will sit here and wait for stocks to run out of downside fuel and pivot higher. I do think we are OVERSOLD to the downside and we should rally off the lows. However, longer term, there is more pain ahead.
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