Morning Notes — Trough

Chartist: The S&P 500 needs to clear resistance at 4150-4200 to build a bullish technical outlook over the intermediate term.  Near-term technical resistance sits in the 3950-3970 range and clearing this level would likely get us to ~4100.  Deeply oversold markets always get reflex rallies that last several weeks and usually measure +10-15%.  The 4100 is ~12% above the recent June 16 low at 3670.  Getting through 4150-4200 will likely require a change in macro fundamentals, specifically a Fed pivot.    

Trough: Longtime semiconductor investors know the usual signs of a cycle trough: 1) 6-8 months in duration; 2) equity prices typically fall ~30% from the peak; 3) ~35% multiple compression; 4) >20% cut to year-ahead estimates.  Semis have been standing out since MU shares rallied +12.5% following earnings guidance and a 60% cut to FY’23 estimates. More estimate cuts are needed, and we expect that to occur during earnings season.  The typical equity bear market follows a similar cycle, and the trough usually comes right after big cuts to out-year earnings.  We all know that stocks tended to peak ahead of a peak in earnings.  They also trough ahead of the earnings trough.  Buy-side investors start looking at year-ahead estimates sometime during the summer with analysts sharpening their pencils and cutting numbers after Q2 reports. This happens in bull markets as well (analysts often too optimistic at first) and often cited as one of several reasons for seasonal underperformance during Sept/Oct. But during bear markets, the cutting of out-year estimates sometimes serves as a clearing event.  The timing of this potential clearing event may also line up with a cooling of realized inflation, lower terminal Fed expectations and an SPX push through 4150.

Next: A Fed pivot would most likely follow a miss in realized inflation.  The next round of inflation data hits after next Wednesday’s Fed meeting with: 1) June PCE (lags by a month) on Friday 7/29; 2) July Jobs Report on Friday 8/5 and; 3) July CPI on Wednesday 8/10. The Fed’s annual Jackson Hole meeting happens in late August (dates released soon) and the next Fed meeting will be September 21 with an updated dot plot.