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Microchip Technology (MCHP) Could Be Warning of a Market Top

The semiconductor industry has a decent track record as a leading indicator for stocks

By Dan Burrows, InvestorPlace Feature Writer

http://invstplc.com/1oXWMHH

The turbulent stock market suffered another blow Friday when Microchip Technology (MCHP) cut its sales forecast and said an industry correction is underway. That slammed chipmakers across the board, which are seen as a canary in the coal mine when it comes to big changes in the market.

Microchip TechnologyMicrochip Technology saw it shares drop by more than 13% in morning trades, taking the rest of the sector — and the tech-heavy Nasdaq Composite Index — with it.

The PHLX Semiconductor Index tumbled more than 6% in morning trading, led by the biggest chipmakers, which fell hard in wake of the news. Intel (INTC) was off 5%, while Texas Instruments (TXN) lost 8%.

As a result, the Nasdaq led the market’s losses, falling more than 1% while the S&P 500 and Dow Jones Industrial Average suffered only fractional declines.

Juniper Networks (JNPR) added to the gloom when it released preliminary results that fell short of its own forecast.

Chipmakers have a decent track record as a leading indicator for market tops and bottoms, so that’s amplifying this round of bad news from the sector. MCHP in particular has a history of seeing where the market for semiconductors is headed.

Microchip Technology: An Industry Bellwether?

Given that backdrop, there’s little wonder that the market would react by selling first and asking questions later. Just have a look what Microchip Technology CEO Steve Sanghi said in a press release:

“[MCHP] often sees the turn of the industry ahead of others in the semiconductor industry. Microchip does business with over 80,000 customers worldwide, most of whom are small and nimble and are able to adjust their demand in real time. We believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future.”

MCHP said the slowdown was led by China. That isn’t surprising, but neither is it very reassuring.

China’s economy has slowed sharply after years of breakneck growth, and that’s putting pressure on a wide range of prices, from coal to copper. Further retrenchment there will no doubt ripple through global markets.

Weak sales from chipmakers also send warnings about everything from tech stocks to corporate expenditures. Technology companies cut inventories when their own sales slow down, and that slowdown is often led by lower orders from corporations.

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Either way, the semiconductor sector has once again been leading the market in 2014 by a wide margin, but the technicals are starting to fail. SOX is up 13% for the year-to-date but topped out last month. The index recently fell through its 50-day moving average and is only about 12 percentage points above its 200-day moving average.

Bottom Line

As alarming as the warnings from the semiconductor sector may be, they’re not a slam-dunk indicator of a market top. Nothing is, which is why it’s impossible to time the market with any kind of reliability.

If you want to reposition your portfolio to carry less risk, go for it. The market hasn’t been this uncertain in a couple of years, at least.

Just don’t follow the knee-jerk reaction of the traders and start dumping equities. In addition to racking up commissions and fees, how are you going to know when to get back in?

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/microchip-technology-mchp-chipmakers/.

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