Semi Sector: A Warning Or A Buy?

We began tracking this negative divergence in NFTRH last year as the leadership of two premier Semi Equipment companies began to decelerate vs. the broad sector.

Over time the ugly patterns became even uglier with breakdowns to new lows. This chart shows that ugliness but more importantly it tries to illustrate AMAT & LRCX as leading indicators for the broad markets. In 2013 it was a big part of the macro signaling that told us to prepare for a coming economic upturn. In late 2015 it told us that the market top of that time probably was no such thing.

Now what? The word from the Equipment companies like Lam Research and from some analysis by SEMI has been that the sector is looking at slack in the supply rope. It’s not taught. It’s loose. The forecasts have been for things to ramp back up again by the end of the year or in early 2019. This view was bolstered by my ‘boots on the ground’ industry contact. Ah, forecasts…

Also posted at SEMI comes this article from industry analyst Walt Custer.

Strong 2Q’18 Global Supply Chain Growth But Second Half Slowing

Either ole’ Walt has not read the headlines about a temporary supply glut or he’s not buying it, on face value at least. Maybe he has been around the industry long enough to know that forecasts are made to be revised; especially in the Semi sector. He’s just going by the cut and dry numbers.

The article basically calls what we already know; that Semi equipment sales have backed up. Read the whole thing (it’s very brief) if you’re interested. But he notes, along with the following chart…

Semiconductor capital equipment sales are historically very volatile, with their growth fluctuating MUCH MORE than electronic equipment (Chart 4). However, both series appear to have peaked on a 3/12 basis for this current cycle.

Now, what is he calling a cycle? He drew an arrow at the latest downturn in volatile equipment growth rates. I inserted notes about the last 2 ‘cycles’. The thing is, it’s really been one ongoing expansion since 2012.