Inside Markets — Bearish Near-Term Bias

We keep a cautious near-term bias into a rolling corporate buyback blackout window that starts Monday and into a seasonally difficult period that usually extends into mid-October. The seasonal weakness mostly comes from negative fund flows (mutual fund year-end etc) and fine tuning of optimistic year-ahead estimates. In recent years, the September sell-side industry conference ‘season’ has been an opportunity for management teams to fine tune/guide down estimates (JPM at yesterday’s Barclays conference). The bearish price action we’ve seen over the last two weeks pulled the SPX below its 50-day moving average, which temporarily removes CTAs as another major source of incremental equity demand. Our cautious near-term bias would become something more serious on a sustained SPX break below 5440. We spent most of this morning below 5440 but it’s really about the close. A break below 5440 would open the door to intermediate support in the 5070-5170 range (~7% below current levels).

The Philadelphia Semiconductor Index (SOX) has been a source of technical concern since it bearishly reversed near technical resistance at 5905. We’ve carried a bullish outlook on semis since Q4’22 when fundamental metrics (downside estimate revisions, peak-to-trough stock declines, PE multiple contraction) reached historical levels associated with the end of a downcycle 9-12 months forward. Semis tend to discount events 9-12 months forward with industry supply/demand fundamentals troughing in Q4’23. Technical support for the SOX sits in the 4210-4420 range. The index rebounded from an August 7 closing low of 4426 following weaker July payroll data on August 2. The SOX rallied back to overbought technical levels before experiencing a second payroll-induced selloff on September 3 that pushed the index to a closing low of 4527 and below its 200-day moving average at 4756. The SOX is now back in recovery mode at 4825, which fits our bullish view of the industry cycle. The upside that usually occurs in semis 9-12 prior to improving business fundamentals is driven by multiple expansion, but the group usually sees another 9-18 months (3-6 quarters) of gains driven by upside estimate revisions. While a cycle peak in July would be premature compared to history, a technical break below ~4210 would complete the right shoulder of an unmistakable bearish distribution pattern.

The 2/5-year yield curve broke above its own 2-year distribution pattern when it cleared -19bp after last Friday’s payroll data. Clearing a technical milestone usually leads to accelerated momentum. Two-year yields are higher this morning after a firmer core CPI print but would look for that to reverse in the days/weeks ahead.