Trend bullish- Pullback should be buyable in SPX and QQQ early next week after the first negative week since early May
A continued decline took indices down further in Friday’s trading, marking four out of five days of weakness and the first weekly decline since early May.
Technology proved to be one of the worst performing groups of the week, outside of REITS and Energy, but failed to show sufficient damage to expect this decline is too important.
Interestingly enough, Utilities and REITS showed very weak performance, and this defensive weakness is a key “Tell” for markets that this past week’s decline was not too serious.
Healthcare bucked the tide of the defensive weakness, however, and finally began to strengthen and Equal-weighted Healthcare turned in the best performance of any of the Equal-weighted sector ETFs this past week. This sector should be favored for outperformance into late July.
Another important “tell” regarded the shape of this decline, and hourly charts show the stair-stepping nature of this past week’s pullback. As can be seen, a very overlapping, choppy decline played out which was far different than the rally from late May into mid-June.
Such a pullback is healthy, from an Elliott-wave perspective, as corrective, overlapping declines normally lead to impulsive, non-overlapping rallies back to new highs.
Moreover, this past week’s decline failed to cause any technical damage to indices, but yet helps Technology consolidate some of recent gains, as well as helping to lessen some of the hourly overbought readings which were in place a week ago.
Finally, it’s important to mention that this past week’s decline will help to reign in bullish sentiment, which had begun to escalate a bit over the past week.
Overall, I sense that early week pullback ahead of the July 4th holiday will represent an attractive time to add to longs ahead of a push back up above 4450 which could reach 4500. SPX should not violate 4275 in my view, and any further decline early in the week likely finds strong support between 4320-4335.
SOX decline should find support into mid-week of next week before turning back to new 2023 highs
Semiconductor stocks (Semis) were hit hard this past week, dropping more than 2.5% with many stocks like TXN 0.02% , MRVL -1.58% , INTC -0.62% , and AMD 9.94% falling much further.
Following four of the last five days of weakness, the Philadelphia Semiconductor index (SOX) is now drawing closer to an area of attractive support.
As absolute charts show, this pullback very well could test early June lows near 3400 which would equate with a 38.2% Fibonacci retracement of the prior runup from late April.
Importantly, no evidence of exhaustion was present at the peak on 6/14/23 to suggest a meaningful decline was about to take place. (Neither on an absolute basis, nor a relative basis to SPX or Equal-weighted Technology)
While commonly looked at momentum indicators like MACD have made bearish crossovers on daily charts, this has not occurred on a weekly basis nor monthly and momentum remains quite positive on the Semis.
Moreover, this pullback has helped momentum fall sharply from overbought territory and should make weakness buyable for those who have held out for technical weakness.
Overall, the area where SOX stalled out at $3743.73 was not too important technically as a resistance zone, but that area lies near $4000 near late 2021 peaks.
I expect that recent weakness should find support this coming week before turning back higher and scaling further to the upside to reach new highs for 2023.
Relative charts which will be shown later in this report show why Semis could be on the verge of a larger breakout vs. the broader market and vs Software which would make this dip quite appealing to consider on this recent weakness.
Bottom line, I like Semi stocks, and feel like SOX does not get under 3300 but likely might bottom near 3400 or just above before turning back higher to challenge and break out above 3744. Targets in that case should point to ~4000, and this should mark more material upside resistance.
My favorite stocks in this sub-industry are ON 0.06% , AMD 9.94% , KLAC 1.23% , and NXPI -1.14% but additionally feel like INTC -0.62% , LRCX -0.41% , MRVL -1.58% , MPWR 4.33% are all attractive technically after this recent drawdown, and represent favorable risk/reward opportunities for a move back to new 2023 highs.
Semiconductor stall out near prior highs should prove short-lived
When analyzing the relative charts of Semis vs the Equal-weighted Technology sector, it can add some perspective as to why this group stalled out and retreated so quickly this week.
This is normally insightful particularly because the SOX on an absolute basis did not seem to be up against meaningful levels that would warrant a selloff.
This weekly chart of SOX vs. RYT (Invesco Equal-weighted Technology sector) shows that Semis had shown such outperformance that they reached the prior relative peak in this relationship that had happened in late 2021 prior to last year’s steep selloff. (The chart of SOX vs SPX looks quite similar (not shown))
However, this stalling out doesn’t appear to serious technically speaking as insufficient counter-trend exhaustion signals are in place to suggest a peak, either in absolute nor relative performance.
Overall, I expect a coming breakout in SOX vs Technology and also vs SPX which should allow for some above-average outperformance into mid-July before any larger stallout. Thus, this helps to add conviction that SOX can likely rally back to test all-time highs just above $4000.
Semiconductors likely to outperform Software into mid-to-late July
One interesting sub-industry development concerns the relationship between Semis and Software which makes a compelling argument for why Semis should be favored for outperformance in the weeks to come.
Relative relationships between two ETF’s of both Semis and Software (PHLX SOX Semiconductors Sector Index fund (SOXX 0.77% ) vs. the Ishares Expanded Tech Software ETF (IGV 1.44% ) shows that Semis have been forming a bullish base vs. Software since early 2022.
In the short run Software has outperformed in the month of June, but this doesn’t look likely to last given the sharp upward momentum in Semis over the last couple months.
My own analysis based on absolute chart structure, relative pattern analysis, and DeMark signal analysis is suggestive of a coming breakout in the relationship between Semis and Software which should favor outperformance from Semiconductor stocks.
Overall, I am expecting this past week’s decline in Semiconductor shares should make this group attractive for strength into July, and favor overweighting Semis within Technology.
