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Why Chip Stocks Leading 2019 Rally Are About To Crash

Semiconductor stocks, boosted by positive earnings surprises earlier in the year, have been leading the stock market rebound following the fourth-quarter rout. But the rally may be short lived as shipping demand for semiconductor chips plunges. “Collapse comes to mind when you look at global demand for semiconductor chips,” said economic forecaster Lakshman Achuthan, co-founder of the Economic Cycle Research Institute. “We’ve got a 20 percent decline in the volume of semiconductor demand, and that translates to a ten year low in the growth rate of demand.” Achuthan made his comments in a CNBC interview.

Chip Stocks Leading the Way

  • SOXX: + 22%
  • Nasdaq 100: + 16%
  • S&P 500: + 13%

Source: CNN Money; YTD performance as of 10 AM EST 03/18.

What it Means for Investors

This bearish view challenges bulls who say the chip sector will see a sustained rebound. But Achuthan says chip stocks are being fueled by misguided investor assumptions about growth of worldwide demand for semiconductors, used in everything from PCs to smartphones to desktops. He says data on the nearly $500 billion semiconductor industry reveal that demand is already showing a dramatic slowdown.

Achuthan attributes sluggish demand to a slowdown in the broader U.S. economy, and says demand for chips is unlikely to recover even with a dovish Fed and the prospect of a trade deal with China. “If the price of semiconductor stocks is banking on some rebound in demand, it’s just not going to happen,” he said. “Demand for a product that these companies sell, that’s not going to go up. There’s no rebound in sight.”

The picture for chip stocks also has looked bearish from a technical analysis perspective in recent weeks. The sector "is back to an inherently difficult level, where overhead supply comes into play,” Carter Worth, head of technical analysis at Cornerstone Macro LLC, said in a recent interview with Bloomberg.

Looking Ahead

While the bulls say a U.S.-China trade deal would boost chip demand, that demand could be muted due to a secular slowdown in China’s economy. Investors would be wise to remain cautious in a sector known for its boom-and-bust cycles.