Inside Markets — Near-Term

Last week, the SPX triggered a short-term sell signal near 5670, which happens to be the upper end of its trend channel. There’s been eight similar short-term sell signals on the SPX since the rally began back in November and each one created a buying opportunity to some degree. We make note of last week’s sell signal (momentum dispersion) but also note the index keeps its bullish trend at levels north of ~5375. A bearish break below ~5375 would likely result in increased selling momentum. Short-term trend support for the NDX sits in 19210-19260 range. A break below 19210 (~3.2% below current levels) would signal a lasting change in trend to support near in the 18100-18300 range (~8% downside to the midpoint). Semiconductor business fundamentals remain strong, but the two-week pullback in the Philadelphia Semiconductor Index (SOX) deserves attention. We see near-term support for the SOX at ~5215 (~4.4% below current levels) with a breakdown marking an intermediate-term trend reversal. Last week’s rally in the RTY took the index through multi-year range resistance at ~2140, triggering large scale short-covering and some early repositioning in small cap stocks. A shift in monetary policy that results in lower real yields would generate a more lasting rotation to small-cap/higher beta stocks. From a near-term technical perspective, the RTY needs to hold levels above ~2100 in order to keep the rotation alive. A new cycle high above 2264 with cross market confirmation from the EuroStoxx 50 (SX5E) and/or copper prices would be a bullish cyclical signal. The SX5E Index and copper prices both traded lower during last week’s RTY rally.

GOOGL and TSLA kick off ‘Mag 7’ earnings season tomorrow after the close. These reports will have implications for the SOX index that sold off -8.8% last week and sits ~4.4% above near-term technical support. Semis saw a similar correction last earnings season after ASML and TSM prints, but recovered on better earnings guidance from TXN and increased capex guidance from GOOGL. This week’s semi reports include NXPI (this afternoon), TXN (tomorrow afternoon) and SK Hynix (Wednesday eve in the US).

Inline Flash PMIs (Wednesday) and an inline core PCE (Friday) would help SPX and NDX continue the recovery from last week’s pullback and could support an ‘everything rally’ led by small cap/cyclically-sensitive stocks. Financials are a cyclical sector with a solid Q2 earnings performance to date contributing to the cyclical/value rally. The Financials sector was expected to generate 4.3% YoY earnings growth this quarter that would put it 7th out of 11 sectors in terms of contribution to SPX earnings growth. But Financials have printed earnings growth of +14.4% thus far with 22 out of 23 constituent members beating expectations. If Financials maintain their status as the 7th best earning sector, the SPX is headed higher.