While chaos appears to be rising, watch these three bellwether stocks for where the broad market is headed, reports Joe Duarte.
Yesterday we discussed briefly how three housing and semiconductor stocks— Texas Instruments (TXN), Applied Materials (AMAT), and KB Home (KBH)— are serving as bellwethers on the health of the stock market.
Looking at our bellwethers, we note that the doom and gloom crowd recently pointed out that Texas Instruments is closing two plants in the Dallas Metroplex, which has been a fairly strong economic area for the past few years. What they didn’t note is that in the same earnings report, Texas Instruments also noted it is breaking ground on a new factory a few miles south of the two they are closing.
In fact, TXN is making the switch from a strategic point of view, not as a sign of business problems as demand for its older analog chips is waning and the demand for new chips is rising. Moreover, TXN joined other companies in the tech sector who have recently said that the bottom of the semiconductor cycle is likely in place, although the company noted that at the moment macro events would dictate the future (see chart below).
And they were not alone. Until the Coronavirus hit the wires, shares of Applied Materials, the company that makes the equipment on which all chips are manufactured, had been moving steadily higher as demand for next generation chips; including those used in 5G and industrial automation (see chart).
Elsewhere in semiconductor land, shares of Dow component Intel (INTC) rallied feverishly, closing near their highs for the day on Friday after the company delivered a huge beat of expectations on its most recent quarterly report.
Outside of the semiconductor sector, KB Homes and other housing stocks have been in rally mode, showing a nearly perfect inverse correlation to the U.S. 10-year note yield. In fact, existing home sales, which had been lagging surprised positively in December, coinciding with bullish reports from realtors and homebuilders. Recent housing data once again underscored that supply is nowhere near ready to meet demand, which in any market usually means that the bullish trend is likely to continue. But KBH also closed sharply lower on Friday, albeit still within reach of its recent highs and well above critical support.
My point is that after a 10-year “recovery,” until the Coronavirus news, the U.S. economy still seemed to have some legs.
Joe Duarte is author of Trading Options for Dummies, and The Everything Guide to Investing in your 20s & 30s at Amazon. To receive Joe’s exclusive stock, option, and ETF recommendations, in your mailbox every week visit here.
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