INVESTING: Semiconductor strength bodes well for overall market

The rally off the March low was powerful, and a few things happened that might reveal a change in the nature of this bull market. If there is an evolution and we’ve identified it, a rotation is called for that will keep us in the sweet spot of this market run. If we’re wrong, we have to be quick to readjust.

By the third week of April, the Dow Jones broke out to an all-time high, taking with it the small and mid-cap indexes. That’s not unusual, though, as it has been happening every once in a while since October.

What’s different this time around is the semiconductor industry also broke out. The sector didn’t reach an all-time high, but the rise could be critical nonetheless. The stock market does best when the NASDAQ is cooking. And NASDAQ does best when the semis are taking off. They took off in April, which led to a 4-percent move by the rest of the market.

At the same time big-cap growth stocks were racing ahead, the small and mid-cap indexes lagged. It is common during the latter stages of a bull market for the bigger companies to outperform the smaller ones. If this is more than a one-month affair, it could signal the next (and last) stage of this bull market, which started more than four years ago.

This stage can and should go on for quite some time, at least another six months. But if the smaller companies are going to continue to lag, this will be the beginning of the signs of fading breadth that always precede bear markets. This deterioration can continue for months, however, before the large-cap indexes see their final highs.

For some time, I’ve been saying 2007 could represent a mini 1999, where the big tech stocks got a lot of the action, and the overall market still did quite well. April certainly played out that way. A breakout in the semis might have unleashed something this bull market has been missing since its inception-raw, blind speculation. Perhaps those types of investors are tired of losing money flipping condos. Whatever the reason, whenever the animal spirits get going, the results can be quite spectacular.

If it turns out the technology run in April was an isolated situation, this bull market can potentially go on for much longer than six more months. Bear markets serve to correct the excesses of bull markets, and without those excesses, the next bear phase could be delayed for some time.

The S&P 500 most likely will be the next major index to hit an all-time high. This will carry more weight than when the Dow did it last October. A majority of the fund managers in America measure themselves against the S&P, and it is therefore closely watched. I believe this will happen sometime between now and the end of June. We may experience a short-but-sharp drop first, simply because the market got ahead of itself over the last few weeks. But any sell-off should be nothing more than a correction, not the beginning of a sustained down move. Keep an eye on those semiconductors during any dip. If the exchange-traded fund SMH doesn’t fall below $35, the breakout might be for real.