Sinking semi stocks are the 'canary in the coal mine,' market watcher warns

Semi stocks are getting knocked off their perch.

Semi stocks are getting knocked off their perch. The once high flying group sank more than 2 percent on Thursday, and the SMH ETF, which tracks the space, is now down more than 7 percent from 2018 highs.

Some strategists not only see further downside for the largely Asia-exposed companies, which have gotten caught in the trade war crosshairs, but view the decline as a warning for the broader economy.

Names like Micron, Advanced Micro Devices, Applied Materials and Lam Research sank Thursday. Micron saw the biggest drop – falling nearly 10 percent due in part to a warning from Morgan Stanley about demand for memory chips.

Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, is concerned about the decline.

"I think we should be paying attention to this. Semis, if you believe the fact that semis lead the economy, they could be the canary in the coal mine in the sense that we are already seeing a lot of anecdotal evidence" that demand for chip stocks is slowing, Schlossberg said Thursday on CNBC's "Trading Nation."

That may be signaling the economy is seeing a slowdown. He would be cautious about stepping into what he sees as a "falling knife," particularly because September is traditionally the market's worst month of the year and trade tensions between the U.S. and China remain.

From a technical standpoint, several semiconductor charts still look sound, said Bill Baruch, president of Blue Line Futures.

Specifically, AMD and Nvidia are still sporting strong respective uptrends while Applied Materials and Micron are pushing lower. He'd avoid those two names.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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