Chips are emerging as market leaders once again. Where the charts signal they are going
Who would have thought the groundhog can also forecast markets? On Feb. 2, “Punxsutawney Phil” saw his shadow, signaling six more weeks of winter. What he should have also told us was to prepare for at least six more weeks of market volatility. As the Nasdaq-100 (NDX) weekly chart shows, we sold off for eight weeks before finding a low and launching back towards the highs. Despite the approach to new highs, I still find this market to be extremely challenging. If we pop the market’s hood, you’ll see it’s growth names — particularly semiconductors — that are driving the bounce, which I take as good and bad. The bears will go back to citing narrow leadership as a reason to distrust the bullish trend. Bulls (myself included) will say the explosive semiconductor rally and related software sell-off helps to confirm the AI revolution is real and we’re still in the early innings. Later in this article, I’ll present a bullish chart of the iShares MSCI Emerging Markets ETF (EEM) that suggests we’re headed higher. But first, I want to take a visual inspection of the macro landscape to see if we can add some fuel to my bullish growth trade fire. Turning quickly over to rates and FX we see the U.S. Dollar Index (DXY) (black) overlaid on the U.S. 10-year yield (blue) since 2018 showing a fairly strong correlation. The Dollar sold off hard in mid-2025 in the midst of rotation out of the U.S. due to the administration’s protectionist, de-globalization policies. The U.S. 10-year yield has maintained a tight consolidation pattern creating a gap between the two. As the latest Federal Reserve minutes suggest, a possible rate cut is still on table. Lower U.S. yields encourages investors to rotate into growth areas of the U.S. market, as well as international equities and particularly emerging markets. We have to believe the market is discounting a ceasefire in the Middle East as crude oil is back below $100 per barrel. Elevated crude oil makes the Fed’s desire to drop rates nearly impossible and will also keep yields, and particular real yields, elevated. If West Texas Intermediate crude futures (WTI) continue to descend, I have to think that’s going to help U.S. rates push lower encouraging the rotation into growth and emerging markets. The S & P 500 (SPX) / iShares MSCI Emerging Markets ETF (EEM) ratio shows the ratio at a very important level derived from a parallel uptrend support from the financial crisis lows. The GFC was the last time EEM outperformed the S & P 500. If the SPX/EEM ratio breaks the $112 level that suggests emerging markets are set to outperform the U.S. for some time to come. Again, a drop in the U.S. dollar, crude oil, inflation expectations and interest rates could all accelerate the rotation into emerging markets. Specifically, we’re watching Latin America and Asia. Circling back to semis after our trip around the world, we have the weekly semiconductor chart SMH. I have little doubt that semiconductors can continue to move higher. The question is can they “go it alone” without broader market participation along with the international equity market interest? Perhaps both can happen, and there’s about to be significant inflow of capital in equity markets. Getting technical, the SMH weekly chart shows some interesting technical relationships. The 2020-2022 rally in the SMH was a total of gain of more than 230% over 616 days. What I want you to focus on is the angle of ascent — 46.5%. Fast-forwarding to the 2023-2024 rally, it was strikingly similar as 239% over 637 days at a 46.05% angle of ascent. This time around, the angle is a far steeper 54.6% angle, which begs the question: Is this rally out of rubble of war an actual acceleration within the AI revolution? Projecting the prior 230%, 600 day rallies puts the SMH at $565 in November. Like the groundhog, this is not a forecast. We’re just applying the concepts of visual investing to assess the surrounding clouds and shadows to figure what’s happened in the past, happening in the present — and what may happen in the future. —Todd Gordon, Founder of Inside Edge Capital, LLC We offer active portfolio management and financial planning for retail investors, as well as regular market updates at www.InsideEdgeCapital.com . DISCLOSURES: Todd owns SMH personally and for clients in his wealth management company Inside Edge Capital, LLC. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.