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This Sector Poised To Outperform In The 4th Quarter

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In my previous two articles for Forbes I have talked about a potential buying opportunity in the Semiconductor space.  The PHLX Semiconductor (SOX) Index has since risen by 7.6%, as expected, but is now close to meeting my initial upside expectations — and thus could be closing in on a near term peak.  Meanwhile, the recent rise in long term US interest rates suggests that there may be a new opportunity emerging in the Financial Sector.

Exactly one month ago, in my September 7th Forbes article entitled The Key To Avoiding A Fall Stock Market Correction, I said “Semiconductor stocks, which tend to lead the U.S. stock market both higher and lower, have recently made an abrupt and unexpected upward reversal which, if it holds, is likely to lead the broad market to new all time highs by year end.

Since then, the PHLX Semiconductor (SOX) Index has risen by  7.6%, versus a 3.4% advance and a move to new all time highs for the S&P 500, as the SOX outperformed the U.S. broad market index by 4.2%. 

Chart 1 below, an updated version of the one from my September 7th article, shows that the SOX is now just 2% from the 1214 upside target stated in that report.

Copyright 2017 Asbury Research LLC

Chart 1

Since this semiconductor index has come so far, so fast, I am suggesting to Asbury Research clients that they consider taking profits on this long idea should our 1214 target be met next week.  Financial asset prices often correct lower once initial upside price targets are met, due to profit taking.  In addition, the last three weeks of October are statistically three of the six seasonally weakest weeks of the entire 4th Quarter in the broad market S&P 500 based on data since 1957, which is another reason to watch for a potential minor pullback once my target in the SOX is met.

Another market call I have recently made is for rising long term US interest rates into year end.  More specifically, I have been saying that a sustained rise above 2.34% in the yield of the benchmark 10-Year Treasury Note would help confirm my analysis by indicating that a major trend change, towards rising rates, is underway.  These yields finished last week at 2.37%.

Since a rising rate environment typically provides a nice tailwind for bank stocks, on September 22nd I discussed the Financial Select Sector SPDR Fund (XLF) to our clients as a new long idea and a potential means to take advantage of my expectations for rising interest rates.  Chart 2 below shows that XLF has since risen by 4%, as rising demand per the dashed green line has overwhelmed static supply as indicated by the dashed red line, and still has an additional 4% to go before reaching my $27.50 per share upside target.

Copyright 2017 Asbury Research LLC

Chart 2

Another potential way to participate in that same strategy, of rising long term interest rates helping to drive financial stocks higher, is via Zions Bancorp ZION -0.71% (ZION).  ZION, a financial holding company, provides a range of banking and related services primarily in Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming.

Chart 3 below shows that ZION resumed its larger February 2016 advance on September 27th, following a seven-month corrective decline during which the stock was able to twice test and rebound from its 200-day moving average, a widely-watched major trend proxy, on May 17th and September 7th.  This testing and rising from underlying support and subsequent breaking above overhead resistance suggests that the major bullish trend is still intact, and is resuming now.

Copyright 2017 Asbury Research LLC

Chart 3

This resumption of the trend targets an eventual, additional 14% rise to $54.50 per share that will remain valid as long as the red declining trend line drawn from the March 1st high, current situated near $45.70, now loosely contains prices on the downside.

Finally, I wanted to briefly address the consternation and hand-wringing that rising interest rates often cause investors that are worried about the dampening effect this may have on economic growth, and on their investment portfolio.  There is certainly something to worry about when interest rates are high, or even when they are at a normal level, but the fact is that long term U.S. interest rates are within just 1.00% of their all-time historic lows.  Moreover, at 2.37% as of Friday’s close, the yield of the 10-Year Treasury Note is almost 250 basis points below its 100 year monthly average of 4.86%.  So, in this particular case, I view rising interest rates as an indication by the bond market, which tends to be more sober, forward-looking, and prescient than the stock market, that the U.S. economy is strong enough to support rising interest rates heading into the new year.  And this should be a positive for the stock market.

This market analysis is being provided for information purposes only and is not a solicitation to buy or sell any financial asset or security. Past performance is not indicative of future results, and no inferences or guarantees of profitability are being stated by the author.

John Kosar, CMT, is Chief Market Strategist at Asbury Research LLC, a provider of technical and quantitative financial market research to institutional money managers and high-net worth investors.