How the US-China trade war affects investors
The US-China (FXI) trade war has especially affected semiconductor investors, as China is a key market for most US semiconductor companies. The trade war has had a bearish impact on the S&P 500 Index, with the SPDR S&P 500 ETF (SPY) falling 14.3% in the fourth quarter of 2018 and 3.8% between May 6 and 10.
However, the semiconductor industry has been more sensitive, with the iShares PHLX SOX Semiconductor ETF (SOXX) and the VanEck Vectors Semiconductor ETF (SMH) falling 15.5% and 18%, respectively, in the fourth quarter and 8% each between May 6 and 10.
In a CNBC article, JPMorgan Chase analyst Jason Hunter stated that investors should be concerned about the trade war if there’s a downturn in the semiconductor industry.
Are semiconductor stocks in a downtrend?
Let’s use technical indicators to see whether or not semiconductor stocks have hit a downtrend. A stock’s moving average takes the average of its prices over a certain period to indicate in which direction its movement is skewed. A stock’s short-term moving average being higher than its long-term moving average indicates technical strength.
SMH and SOXX are trading near their 50-day moving averages, which are higher than their 200-day moving averages, indicating technical strength. These two ETFs have fallen, but they’re still far from experiencing a downtrend. A stock is said to be in a downtrend when its price dips below its 200-day moving average.
SMH and SOXX last saw a downtrend in October 2018, when the market crashed and the two ETFs fell below their 50-day and 200-day moving averages. They continued to fall for almost three months, hitting bottom on December 24. They started to recover in 2019, and it took them a month to get out of the downtrend and cross above their 200-day moving averages. The recovery continued, and the ETFs moved into an uptrend in March 2019. They reached their all-time high on April 24, just before their first-quarter earnings releases.
SMH and SOXX are currently trading 9% and 12% above their 200-day moving averages, respectively. If they fall below their 200-day moving averages, the semiconductor sector will be in a technical downtrend from which it could take months to recover. The last downtrend lasted four months.