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This Corner Of The Market Could Be An Indicator Of Where Stocks Head Next – Here’s Why

This Corner Of The Market Could Be An Indicator Of Where Stocks Head Next – Here’s Why

This sector has been a leading indicator for the broader market. And there’s 1 stock in the group that’s approaching a level that one strategist says would be “wildly bullish” for the stock if it can break above it.

After a wild September, we’re at the start of a month that could prove to be even rockier.

There are a number of factors weighing on the market now, chief among them the U.S. presidential election in November, the battle between Democrats and Republicans over a possible new stimulus bill, the continuing economic recovery, heated tensions between the U.S. and China, and, oh yeah, the ongoing coronavirus pandemic that has infected 7.6 million and killed more than 212,000 Americans.

That list should be enough to make investors nervous, and with stocks at high valuations, things could get dicey in October.

But Miller Tabak chief market strategist Matt Maley says there’s one corner of the market that will act as a leading indicator for which direction the market will head.

“The semiconductor group has been an important one for many decades in a leadership sort of way,” Maley said. “But in the last three or four years or five years, it’s been particularly good in giving us a sense of what’s going to happen to the market next.”

According to Maley, semiconductor stocks are at a crossroads and their next move could either signal that the market is going to roll over or breakout.

Pointing to the SMH VanEck Semiconductor ETF, Maley said, “This time last week, the SMH was testing the bottom end of the sideways range it had been in over the last week or two so it looked kind of perilous there, but this week the group has rallied over 5% and actually broken slightly above the top end of that range and so that’s positive.”

Source: TradingView.

The level to watch now, Maley says, is the all-time high hit on September 2, which the ETF is sitting just below now. 

“If we break above [that level], it’s going to show that the tech group looks real good, especially the chips, and the broad market is going to move higher, so we’ll see if we get a dip first or for it to rally first,” Maley said.

As for which chips stocks in particular to watch now, Joule Financial’s Quint Tatro says not all stocks in the sector are created equal.

“Despite the performance, we’re not a fan of Broadcom (NASDAQ: AVGO) here,” Tatro said. “The company, really over the last several years, has levered up the balance sheet significantly, now almost two times debt to equity [and] paying $13 in dividends. … So, they’re playing a dangerous game here.”

However, Tatro said he prefers instead, Applied Materials (NASDAQ: AMAT). Tatro argues that the stock offers an attractive valuation at 13 times forward earnings. 

Maley, too, likes Applied Materials and said if the stock can break above its double-top high of $68.50 in the medium-term, it would be “wildly bullish” for the stock. AMAT shares currently sits -9% below the $68.50 level and the stock has been steadily climbing higher since the end of September.

Source: TradingView.

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