Semiconductors Are Down 9% and Dragging the Nasdaq: The Cracks Hiding Under the Index

What the Index Alone Hides

The Nasdaq is down 1.18% at the time of recording. But there's something more notable. The names I congratulated all the way up, I now have to acknowledge on the way down.

Semiconductors had a monstrous run-up over the last few months. If you were long Nvidia, AMD, or Intel, you enjoyed some enormous moves. But after that kind of explosive run, a correction is completely normal. And right now we're seeing the early onset of one — semiconductor stocks are already down about 9%.

Semis are volatile. If you can't handle the heat, you should probably stay out of the kitchen. Semiconductors were the main reason the Nasdaq staged such a monstrous recovery, but they can just as easily drag the index lower if we keep seeing higher inflation and structurally higher yields.

Open the Hood

At the index level, the market looks relatively strong. But open the hood of the truck and the story changes.

Our market breadth tool shows technology stocks putting up really strong performance. Now look at the rest. Most consumer cyclical, financial, health care, industrial, consumer defensive, communication services, utilities, and real estate stocks aren't getting the same love among the names we track. A lot of them have already lost their 20-day moving average.

In other words, the market's strength is very isolated to specific pockets. A few areas are doing great while many stocks lag overall. A narrow rally is a warning sign in itself.

A Macro Score of Minus Five

Isolate the macro and the picture for stocks looks pretty dire.

We have structurally higher inflation — higher than anticipated, even. PMIs missed expectations. GDP growth came in softer than expected. Wage growth was soft. Jobless claims weren't as good as hoped, and ADP wasn't either. NFP was solid, but that's about where the upbeat data ends.

I see a minus-five macro score on the Nasdaq, with inflation flagging risk and economic growth flagging risk. So trading the Nasdaq long at these levels just doesn't make much sense to me when you isolate the macro fundamentals.

Institutions Are Selling

Institutional activity has been showing selling on the Nasdaq too.

Looking at the COT velocity chart — the week-over-week change in institutional positioning — the Nasdaq has seen pretty sharp selling. So has the Dow Jones, and so has the S&P 500. Over the last month the Nasdaq has seen a lot of selling, and the same holds on a quarterly basis.

While this market is in melt-up mode and a lot of people are excited, I'm a little worried they're discrediting the risk of oil staying elevated for a long stretch. Oil is trading around 103.25, and plenty of people have called for a huge crash that simply hasn't come.

How I See It Right Now

The risk-reward on the Nasdaq just isn't good here, in my view.

The early days of the geopolitical conflict, when people thought it was the end of days, were actually a great chance to add stocks. Now people seem to be doing the opposite — discrediting the oil-shock and inflation risks. My view, and it's an opinion rather than financial advice, is that waiting for lower prices is the better risk-reward here and now.

Over the long term, that's a different conversation; I'm talking strictly about trading opportunities. One more thing: Bitcoin is very sensitive to rates. Remember that the fastest hiking cycle in history sent it crashing in 2022. With rates back at the center of this market, that sensitivity matters again.

This is my personal analysis and not financial advice.