April is usually worst month for chip stocks. Will this continue?

Markets' Volatility Index (^VIX) is surging ahead by over 10% Tuesday morning, the second trading session in April. The month has historically been a period of "unwinding" momentum for stocks, according to BTIG Managing Director and Chief Market Technician Jonathan Krinsky.

Krinsky joins Yahoo Finance Live to discuss whether the month — which is also the beginning of 2024's second quarter — could put a pause on year-to-date gains across markets and industries like the semiconductor landscape:

"It's actually the worst month of the year on average for long-short momentum strategies. We're seeing areas like semis, which have had an amazing run starting to pull back. And then you're seeing areas like utilities which have lagged over the last few months start to actually perform well. There's different parts of the market doing different things. But, ultimately when you get that kind of momentum, that correlation break, that's when you see the rising Vix like we're seeing today."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

- The market sell off is accelerating this morning during a week of economic data from the labor market and from the manufacturing space. Our next guest is looking at areas where momentum might start to unwind and implementing a playbook to mitigate potential risk with regards to that.

So joining us now, we have Jonathan Krinsky, BTIG managing director and chief market technician. Jonathan, thank you for being here this morning. I want to start with you on some of the volatility that we're seeing because we're seeing that the VIX is really on a tear today, up I think 1.3 points as of the last time that I checked here. Talk to me about what that is an indication of when you are looking at the technicals and what it means for what this market is trading on and what they're thinking about what the Federal Reserve's next moves might be.

JONATHAN KRINSKY: Yeah. Well, I mean, ultimately the VIX is primarily an inverse to what the market's doing, right? Well, you can have periods where the VIX will go up in a rising tape generally. VIX up, it happens when you get market selling off. And I think when you've looked at what's going on in the market over the last few months, it's really a function of massive dispersion.

So you've had the winning stocks, the high momentum stocks doing extremely well, and the low momentum stocks doing extremely poor. And so there's been a lot of volatility in the single stock space below the surface, but they've just kind of offset each other. And so you've kind of had this calm S&P 500 on the surface, and that's coincided with a low VIX.

So I think now we're starting to see a little bit of that momentum unwind, which is typical in April actually. You tend to get-- it's actually the worst month of the year on average for long-short momentum strategy. So we're seeing areas like semis that have had an amazing run starting to pull back. And then you're seeing areas like utilities, which have lagged over the last few months, starting to actually perform well. So there's different parts of the market doing different things. But ultimately, when you get that kind of momentum, that correlation break, that's when you see the rising VIX like we're seeing today.

- Well, let's saw you mentioned chip stocks. Let's focus on the stocks here for a second on the Wi-Fi interactive. I have the iShares semiconductor ETF SOXX. Here's a year to date. You can see we've kind of stalled out, as you said, over the last month, trading sideways there. Here is the last year. So this is actually still in an upward trend it looks like by my crude drawing. We had this big five-month rally. How much more downside should we expect before if this stock or if this industry group is able to regain its highs?

JONATHAN KRINSKY: Yeah. So you know, semis have been one of the best groups in the market for some time now. By many metrics, they're as extended as they've been in two decades. The S&P 500 semi index, depending on how you look at it over the last five months, biggest five-month gain since 2000. The spread versus 200 day moving average is about as high as we've seen over the last couple of decades. So it all says it's priced for perfection.

And then what's interesting is that while April is generally a pretty good month for the overall market for the S&P and even the NASDAQ, it's been one of the worst months of the year for semis over the last decade. It's been down about eight of the last 12 years. So the setup there is for some continued weakness. As far as how much further downside, that's tough to say. I think we'll take it day by day. But certainly that's one of the biggest parts of this momentum online if indeed that's what we're seeing right now.

- Jonathan, I'm going to oversimplify a field that I know you and Jared are both experts in. So please just go with me on this journey here. But I know in the technical space, you look to the past as an indication of what could be coming in the future. How effective is that strategy when we didn't have ChatGPT a couple of years ago? And more directly, I'm kind of asking, like does what happen in the semis space make sense anymore in a world where we have AI?

JONATHAN KRINSKY: I mean, that's a great question. I think ultimately, it comes down to investor psychology and human emotions. They go through the same patterns through every cycle. And so every cycle is different. But ultimately, when you see certain metrics and certain patterns emerge, it is somewhat consistent over time.

And so we're certainly in a new, exciting up cycle for the semi AI trade. And it doesn't mean that the run is over by any means. But you know, I think if you're talking about the next couple of months, especially this month in particular, I think you just have to be a bit careful in the semis here. But yeah, it's certainly an exciting time with some new technology coming out.

- Jonathan, I got a bunch more questions, but we do have to leave it here. Always appreciate you stopping by. Jonathan Krinsky, BTIG managing director and chief market technician.