Wednesday's Market Minute: The Battle Lines Are Drawn

A battle for the direction of the stock market is fully underway, and it’s a contest between near-term Macro pressure and longer-term Micro momentum. With the S&P 500 closing below summer-long support of 4,350 on Tuesday, bears appear to be gaining an edge, but the trend hasn’t fully broken just yet.

It’s no mystery what’s causing a headache for equity longs right now: bonds. The almost year-long rally in stocks hit a wall the moment Treasury yields got back to last year’s highs, and things are looking more and more like last year’s mess by the minute. Crude oil’s been unstoppable, the dollar’s reasserting its dominance, and on Tuesday in particular we saw one of the most worrisome signs of a bond market out of control: Treasuries selling off in the middle of a stock selloff.

All of that macroeconomic weight is bearing down on the cornerstone of the market’s microeconomic momentum: the earnings potential of artificial intelligence. There are signs of a true secular growth revival around this theme, with products and services quickly becoming available to consumers, and some bold earnings predictions from some of the most important tech companies in the world. The catch is that investors are likely now overpaying for this potential when you consider stock valuations relative to what you can get in the bond market. 

All of this shows up pretty clearly in the charts. Some technicians see a dreaded head-and-shoulders pattern forming over the past three months, with the neckline – the level that must hold to prevent a deeper downturn – around 4,350. Regardless of whether this is the correct pattern interpretation, 4,350 has key fundamental ties to the bull story: it’s exactly the level stocks jumped to after Nvidia’s blowout earnings report in May.

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There’s still some hope in Nvidia NVDA, whose chart remains in a clear uptrend of higher-highs and higher-lows. But its effect on the market is weakening as interest rates pressure other trades. Expand one’s view by one order of magnitude to the chip sector overall and the technicals begin to weaken: the VanEck Semiconductor ETF (SMH) tracking the group just fell below its August low, marking the second lower-low since last October and thus a downtrend.

Investors will be faced with a bunch of data in the second half of this week, including inflation, and if Nvidia – the last stalwart of the bull bounce – breaks, bears are clearly back in control.

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