Markets

If these stocks break down, then you know the trade war is serious

Key Points
  • A downturn in the semiconductor space would be a meaningful warning sign in the trade war with China, J.P. Morgan says.
  • Companies like Qualcomm, Broadcomm and Micron have more than half of their revenue exposure to China.
  • The semiconductor ETF, the SOXX, is up more than 30% year to date.
A close-up of a the Infineon microcontroller kit XMC 4700 is pictured at an exhibition during the German semiconductor manufacturer Infineon's annual shareholder meeting in Munich, February 21, 2019.
Andreas Gebert | Reuters

A further breakdown in the semiconductor space would be a meaningful warning sign that a trade war with China is coming, according to Jason Hunter, chart analyst at J.P. Morgan.

Hunter, who strictly follows charts to make buying and selling recommendations for clients, said in a note Tuesday that they should watch the 1,430 level on the Philadelphia Semiconductor Index (SOX). If the index falls below that, it could mean trouble.

The group was getting pounded on Tuesday, but had yet to break that key level of support yet.

"Starting with the Philadelphia Semiconductors Index underperformance through most of 2018 and then strong relative outperformance late in the fourth quarter, even as the broad market came under accelerated bearish pressure, the industry group has been one of the more sensitive groups to US-Chinese trade developments," Hunter said in the note.

On a fundamental basis, the industry group is one of the more sensitive groups to U.S.-Chinese trade tensions. Companies like Qualcomm, Broadcomm and Micron have more than half of their revenue exposure to China.

Trump tweeted Sunday threatening to raise tariffs on $200 billion of Chinese goods, and possibly add tariffs to another $325 billion of goods that had not been subject to them previously.

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Investors are looking for clarity at this point. The trade talks with China will go forward this week, CNBC reported Monday. But U.S. Trade Representative Robert Lighthizer also said the new tariffs will go through on Friday.

The SOX index still up more than 30% this year and Hunter said the index continues to bullishly consolidate above the recent breakout for now.

But the index was down more than 2% on Tuesday on the tough talk from Lighthizer.

Hunter also said the fact that the S&P 500 held near 2,900 on Monday is a good sign for now. It would take a drop through the 2,800 to 2,846 layer to signal the broader 2019 market rally was breaking down. The S&P was down for a second day Tuesday, off 1.5% to around 2,888 in midday trade.

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