US Equity indices remain within established uptrends despite Wednesday’s sharp pullback to three-day lows. While Technology bore the brunt of this selling, the broader market held up much better, with six sectors higher on the day and REITS, Energy, Financials and Staples all finishing higher by more than +0.50%. The US Dollar and Yields are both headed lower, as DXY officially broke $104 today, and should eventually prove bullish for Emerging markets and Commodities. Overall, my expectation of a post expiration selloff looks to have gotten underway earlier than expected. However, given that breadth levels have improved markedly and there looks to be solid evidence of the “great rotation” getting underway, I expect this deterioration to prove short-lived and buyable, likely into end of week, or next week at a maximum. SPX should not fall under 5500 before turning back up to push to 5800. Meanwhile, QQQ has strong support between 473-475.
As discussed late last week, (From 7/12/24 report) “Technology could be stalling out vs. the broader market in the weeks ahead. This began a lot quicker and seemed quite sudden and severe as many of the former highflyers fell sharply between Tuesday and Wednesday’s close.
However, breadth held up admirably on this recent consolidation, and one cannot make the case of any trendline deterioration, and/or evidence of other sectors showing much technical damage on this minor “blip”.
As shown below, SPX has pulled back to test this larger uptrend which lines up near last Thursday’s lows at 5576.53. If this area gives way, then a quick move to 5500 might be possible. However, I view this mean reversion in sector rotation to likely provide a buying opportunity for US benchmark indices by next week.
S&P 500
Semiconductor stock ETF falls the most since 2020
The VanEck Semiconductor ETF, SMH, fell to the lowest levels since early June today, and did so on the highest volume seen since March.
An open gap to fall to multi-week lows on heavy volume which closes near the lows of the day normally is considered to be short-term bearish, and could allow for additional downside over the next 1-2 days.
However, I feel that $241-$245 should prove to be solid support for SMH, and should prove to be the maximum area for support before a rally back to highs.
Given that this pullback has undercut June lows, it appears like an ongoing ABC corrective pattern from an Elliott perspective.
In plain English, this means that a minor pullback has gotten underway, but one which does not represent a serious top, and a further decline likely proves short-lived and could be nearing support by end of week.
Stocks like NVDA look to have strong support between $111-113 and that area would represent an excellent area of risk/reward support on dips, in my view.
VanEck Semiconductor ETF
Technology weakness happening from an extended position, but larger charts still in good shape
As mentioned in last Friday’s report (7/12/24- “Broader Market could play Catch-up to Technology as IWM breaks out”) Equal-weighted Technology showed signs of stalling out heading into this week.
In last week’s report, I discussed why this might happen, along with suggesting that no meaningful peak in Technology was happening.
While the sharp pullback in Technology in recent days certainly seems extreme, this directly followed a very parabolic rally in Technology from mid-April.
As can be seen below, RSPT vs RSP in ratio form has not violated its current uptrend and looks to be simply consolidating following its recent push back to new all-time highs.
DeMark indicators did suggest a possible stalling out in “Tech” given the formation of TD Sell Setups on this ratio of Tech vs. SPX (in Equal-weighted form) last week. That clearly looks to have begun this week and cannot be completely called “over” at this point.
However, I’m inclined to think this minor pullback in Technology should be complete within the next couple weeks and potentially by this coming Friday/next Monday before a rally back to highs.
S&P 500 Equal Weight Technology vs S&P 500 Equal Weight
Better breadth levels likely mean selloff proves short-lived
The chart below shows the percentage of stocks above their respective 20, 50, and 200-day moving averages.
As might have been expected, given a rapid comeback in Small and Mid-caps, Regional Banks, Biotechnology and Transportation stocks, breadth levels are much better than they were last month at this time.
The mean reversion seen into lagging sectors and out of Technology has been helpful towards restoring some balance in this market after an unusual period of divergence.
While some investors might view the Technology decline as being bearish for ^SPX, the rapid comeback in other sectors has helped to buoy the market, and breadth finished just 3/2 negative on Wednesday, far better than normally might be expected.
Given that Percentage of Russell 3000 stocks above their 200-day moving average have advanced to back over 70%, and uptrend lines for nearly all the major US benchmark indices remain intact, I’m inclined to think that the recent selloff proves short-lived before a snapback rally to new highs gets underway.
iShares Russell 3000 ETF
