Good morning,
With little in the way of major economic data or earnings announcements this week, markets have been anything but quiet during the first full week of July. Another round of White House rhetoric regarding Iran, coupled with increased military activity in the region, triggered a mid-week selloff in stocks and bonds while oil prices briefly spiked. Meanwhile, the technology correction that began in June has paid little attention to the turn of the calendar and continues largely unabated.
Interestingly, oil prices have since stabilized, and markets appear to have moved past the Middle East headlines despite little evidence of meaningful progress. The same cannot yet be said for technology—particularly the semiconductor sector.
The Philadelphia Semiconductor Index (SOX) has surged an extraordinary 88% in less than three months. By one widely cited framework, it now meets Harvard professor Robin Greenwood’s definition of a market bubble. Greenwood’s work offers a practical, evidence-based way to evaluate bubbles because it focuses on probabilities rather than predictions. (If you’re interested, email me and I’ll be happy to send more on his research.)
The challenge with most bubble analysis is that it identifies peaks only after the bubble has burst—not especially useful for investors. Historically, one of the more reliable leading indicators has been the trend in month-over-month semiconductor billings, which has often signaled when enthusiasm is beginning to fade.
At this point, however, that evidence simply is not there.
For now, we’ll have to live with the heightened volatility that naturally accompanies a move as dramatic as an 88% gain in three months. We recognize that the risk/reward profile has become less favorable, but we’ll continue to wait for stronger evidence that a durable top is forming rather than reacting to increased investor nervousness alone.
Have a great weekend.
Be well,
Mike