Recent weakness in the technical sector has been a cause for concern to many investors and traders alike. With the wildly popular Apple (AAPL) trading well off of its new all-time high of $705 back on September 21st, tech has been looking rather bleak. The Nasdaq Composite Index has been a major laggard—the index is down roughly 1.7 percent at the time of this writing.
Focusing in more closely on the technology sector, it is prudent for traders to follow semiconductor stocks, as they are highly correlated to other “mega cap” names such as Apple (AAPL), Microsoft (MSFT), and IBM (IBM). To give you an idea of the major market players— Intel (INTC), Texas Instruments (TXN), and Broadcom (BRCM) are the “blue chip” names in this field. However, here at Schaeffer’s, we decided to focus in on a more specific area—small cap companies that are a part of the Russell 2000 Index (IWM).
Senior Quantitative Analyst Rocky White helped to filter out a list of all tech stocks from the Russell 2000 (IWM). In total there are approximately 250 stocks (12.5% of the index) with 50 semiconductors and 200 additional tech companies. Below is a year-to-date graph that represents the two indexes he created, plotted against the large-cap S&P 500 Index (S&P scale is on the left, indexes on the right).
It is rather clear that both sectors have been underperforming the S&P 500 year-to-date, and this lagging performance is not something we would like to see. Those of you familiar with our work here at Schaeffer’s may have come across Senior Equity Analyst’ Joe Bell’s take on small caps and their importance in confirming the benchmark S&P 500 Index. Over the past ten years, small caps have outperformed large caps and technicians prefer to see a rotation into these smaller companies as it shows a “healthier” risk appetite due to the tendency for these names to have higher Betas.
Below we have also plotted the same aforementioned indexes against the S&P 500 over a longer timeframe that dates back to 2007. While semiconductors were outperforming the other two indexes back in 2007, they almost immediately took a rather hard hit when the market began to tank and finally bottomed in March, 2009. The encouraging thing from the below graph is that they did lead the way once the market bottomed and it was not until July, 2011 that they fell behind.
From a fundamental picture, semiconductors are the “foundation” of many modern technological advances—radios, computers, and telecomm are just a few examples of the hundreds out there that wouldn’t be possible without this advancement in science. In conclusion, it would be ideal to see the semiconductors advance before the tech companies follow suit. Our study of strictly “smaller cap” companies is unique in the sense that many individuals may “overlook” these smaller businesses. Whether or not the semiconductors in the Russell 2000 Index (IWM) can play a role in confirming the S&P 500 may play a major part in determining if this already +15 percent bull-run in the market continues.