Looking at the current rally you can see that semiconductors and NASDAQ are not always linked. NASDAQ has put together and maintained its upside move even as SOX modestly bounced and then spent the past three weeks selling back down. NASDAQ itself is not just tech laden anymore. Other issues are benefiting from the decline in technology price and exerting more impact on the overall index. Financials, biotech, energy, medical appliances, and healthcare are just a few examples of sectors that are exerting more influence.
It is also important to put into context what it means when the chips say they are not going to increase their earnings, revenues, etc. That is bad for their stock prices and that does have a drag on NASDAQ. But lower revenues often means lower prices for their goods. If demand tanks, then that is a problem for the entire economy; almost everything has a chip in it. What we are seeing is that a lot of areas that incorporate chips into their products or services are enjoying strong demand even as chip revenue is flagging. Thus the cycle where chips make big margins may already be over in this round of growth, and now the other sectors are taking over. Chips were an early leader off of the October 2002. We made great money on them that fall and then again as the market rebounded in March. Now we see the expansion moving into other areas and NASDAQ continues to rise as SOX continues to fade.
Thus there is more detachment between NASDAQ and the chips. They are still very important in our view of technology, but as with the PC, there are areas of chip-making that are mature. Wireless was a new area the past three years and demand for those chips shot higher. We see now that demand is ebbing some for those. At the same time other areas are showing strength such as chips TXN makes for certain television technology that is just emerging. Those areas will show growth in relationship to the rest of the economy where as chips that go into PC’s as we currently know PC’s is flat at best. DELL is not selling more computers because demand is surging but because it is taking more market share from its rivals. Those chip makers and chip equipment makers that purvey those chips and their equipment are in the same boat.
SOX is still an important component of NASDAQ, but it is not as important as it has been (is it a has been?). Still very important to watch, particularly if chips go into a big dive or rally.