Two bellwether semiconductor stocks break out to new highs

Key points:

• Micron Technology and Applied Materials broke out to new highs after significant base formations
• Similar price patterns preceded higher prices for both stocks, especially in the near term
• The breakout bodes well for the broad market over the next year

Can the semiconductor industry lead the broad market higher

In January, I highlighted a bullish breakout for the semiconductor industry. Like the overall market, most stocks have been consolidating for the last three months until now. 

On Wednesday, two industry bellwethers broke out of significant base formations. 

Micron Technology, a memory chipmaker, closed at a 9-month high but not a 12-month high. And Applied Materials, a semiconductor equipment manufacturer, closed at a 12-month high but not a 24-month high.

Similar breakouts preceded positive returns

When Micron registers a 9-month high but not a 12-month high, the base breakout leads to further upside momentum, especially over the next month. Semiconductors and Technology, in general, struggled in the late 80s to early 90s. Since then, results have looked significantly better, with some eye-catching signals like 2013 and 2016.

Suppose I apply the Micron signals to the semiconductor sub-industry group. In that case, the results are not nearly as good. So, one must be mindful that what's good for Micron (memory chips) might not be as good for a broad basket of semiconductor stocks. 

Applied Materials, a semiconductor equipment manufacturer, broke out of an even more significant base formation than Micron when it closed at a 12-month high but not a 24-month high.

When Applied Materials registered a 12-month high but not a 24-month high, the stock was higher 84% of the time over the next two weeks. Long-term results are excellent except for the period between 2003 to 2005 when value-oriented stocks lead the broad market. 

Results look excellent when I apply the signals to the semiconductor equipment sub-industry group, especially in the first month. The alert shows a gain at some point over that horizon in 17 out of 19 precedents. Once again, long-term results are outstanding, except during the 2003-05 value cycle.

What about the broad market

A significant base breakout for Micron or Applied Materials was a bullish development for the broad market. IN BOTH CASES, the S&P 500 was higher a year later in all but one instance. 

What the research tells us...

Semiconductor stocks are moving again, with a significant base breakout from two industry bellwethers. After similar price patterns, Micron and Applied Materials showed solid near-term returns and win rates. What's good for semiconductors is good for the broad market. A year later, the S&P 500 was higher in all but one case.