Chip Stocks Are Poised to Drop. Look at These 2 Charts.

The S&P Semiconductors Select Industry Index is rolling over—and that’s bad news for the broader stock market.

S&P Semiconductors is an equal-weighted index. Unlike the broad stock market indexes, its relative strength has recovered just half of the decline from its 2000 top. Because the index is often a leading indicator for the stock market, its inability to breach resistance indicates that the broad stock indexes will be pulling back in the coming weeks.

The chart below illustrates the weakening relative strength of the group. Against the S&P 500 Equal Weight Index, the semiconductors have formed a rounding top at a 23-year resistance. And while many indexes exceeded their 2000 peaks by healthy margins, the semiconductors’ relative strength recovered just half of its decline from its 2000 peak.

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