Sunday 25 February 2018

Is the US stock market about to dive?

Traders work on the floor of the New York Stock Exchange. Photo: Reuters
Traders work on the floor of the New York Stock Exchange. Photo: Reuters

Kyle Caldwell

Investors are always looking for clues to help them second guess the future direction of stock markets.

Measures such as "Cape", the cyclically adjusted price-to-earnings ratio of a market, are taken by some as a guide to whether now is the time to buy or sell.

Another technique takes the yield of a stock market and compares this with the yield on the government bonds of that country. Experts say it is normally a buy signal when the stock market is offering the higher level of income.

But none of these are infallible and all can be upset by the biggest cause of sharp swings – sentiment. Investors have found this to their cost in recent weeks, with global stock markets spooked by events in Greece and China.

But for believers in the power of charts, AJ Bell, the broker, says there is a another one to keep an eye on - the Philadelphia Semiconductor Index, known as the SOX.

The index is home to 30 semiconductor companies, businesses that develop and manufacture micro-chips. The majority are American, with Intel the most famous name. One British share, ARM Holdings, whose chips are used in virtually all smartphones, also features in the index.

The firm says investors should keep a close eye on the SOX as it has has a strong correlation with America’s stock market, the S&P 500, which is itself viewed as a benchmark for how other global stock markets perform. The SOX is generally more volatile and has tended to forerun the larger index.

The chart below shows has how closely the SOX has matched the S&P 500 over the past decade.

Russ Mould, of AJ Bell, said: “Whatever the product or service, there will be silicon chips – semiconductors - somewhere in the food chain, be it within a computer, handheld device, car, aircraft or smart-meter. Silicon chips are therefore a useful proxy for economic growth and the SOX index has historically been a good guide to where America’s S&P 500 index might go – and by implication the world, as the US is the biggest and most influential stock market of all.”

The bad news for investors who believe the theory is that the SOX is now on the slide, racking up a 13pc loss since the start of June.

The index has been heading lower since hitting its highest ever level of 746 last month, beating its previous peak of 700 achieved in 2000 during the tech boom. At the end of last week the index stood at 667.

Mr Mould said several profit warnings over the past month have knocked the SOX index off course.

Over this period, however, the S&P 500 has been flat, up 0.5pc. The chart below show how closely the index and the S&P 500 have moved in the past year.

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