Stocks at Highs. Oil at $105. One is Wrong.
The S&P was up 0.73% last week, closing at a new all time high on Friday.
Markets spent most of the week balanced to sideways, but notably closed the gap on Tuesday and supported the same level on Thursday’s liquidation break.
So far bulls continue to dominate the price action with sellers unable to achieve a substantial pullback towards the prior all time high level at 698.
Concentration is narrowing, and if the market don’t see rotation this week perhaps some downside levels are tested. More on this below.
AI Is Bid… But So Is Oil
SOXX (iShares Semiconductor ETF) set its largest monthly return ever. It has currently closed higher 18 days in a row.
SMH (VanEck Semiconductor ETF) set its largest monthly return since 2003.
Combine these ETFs have received over $5.45 billion of inflows, more than shattering any other monthly record.
To say that semiconductors are on fire would be an understatement.
This is undeniably bullish, but the risk now lies in the idea that a pullback here doesn’t have much structural support. Does price set an arbitrary higher low? Does price move all the way to retest the breakout point? Will the 20 SMA act supportive?
Any pullback in semis must be met with a fierce rotation into other heavy weight risk on assets noting that crude oil really hasn’t come down substantially.
Note below that the correlation between /BZ (Brent Crude) and /NQ (Nasdaq 100) has broken the 0 line and is no longer acting inverse.
I still believe that markets are looking through the Iran conflict and focused more so on earnings. However considering crude is naturally an input cost the dislocation can’t exist forever. American Airlines earnings results and conference call guided second quarter EPS to be flat, despite robust consumer demand, due to the increase in jet fuel expenses. This is the first place we’re seeing elevated oil hit margins in real time.
Who’s going to be next and where are the downstream effects?
Retail sales tell a similar story if you look behind the curtain. On Tuesday the headline number came in at 1.7%. Strip out gasoline, up 15.5%, and you’re left with a weighted result of just 0.674%…
Inflation expectations continue to rise with this backdrop as well. University of Michigan numbers came in revised to a 4.7% on 1 year expectations and 3.5% on 5-10 year expectations.
So while semiconductors carry the market for now, under the hood, a stickier inflation story is brewing that the Fed will have to face head on.
Next Week Makes Or Breaks Markets
Last week the charts all set the tone. This week is all about confirmation.
Buyers have momentum, leadership, new all time highs. This week surfaces many questions:
- Do mega-cap hyperscalers confirm the AI bid through earnings conference call capex reviews?
- Does oil calm down and remain range bound or keep pressure on inflation expectations?
- Does Powell sound flexible or defensive?
- Do semis keep leading or was this a blowoff top into earnings? (buy the rumor sell the news)
- Does breadth improve or does a narrow and crowded tape persist?
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Broad Market Analysis
SPY – Weekly
New all time high close with plenty of room for higher low pullbacks to keep the trend up over 698 prior all time high or the bottom of the old balance range at 675.
Note that the confluence of the 20 SMA, aVWAPs and Fib 38.2 will keep moving higher the higher price goes. The 675 level is still structurally correct, but will become less “relevant.”
SPY – Daily
Last week resulted mostly in a balance range that finally started to breakout on Friday. If price moves into blue sky territory on a higher low over 712.4, the upper bound of the weekly expected move is the only reference.
Should price fail back into the balance range, balance rules call for targeting the bottom of range at 702.5 which is near the lower bound of the weekly expected move.
On deeper pullbacks, I am still quite interested in gauging the reaction of buyers on the retest of the prior all time high at 697.85 with wiggle room down to the prior pivot as well around 693.75.
SPY – Hourly
Balance rules will provide the best opportunities near the extremes of the range. Chop seems more likely in the mid point of the range which I would try to avoid new entries in. Note how the pATH test for a daily higher low has the 1h trend flip to down with a lower low under the 702.5 level. This is required.
If the market has a strong downward reaction to start the week, and sectors (which we’ll get into later) are NOT rotating, I would think the first unfilled gap below us is the first major downside target. From there its worth re-evaluating to see where we are in reference to the daily 20 SMA (orange) or any of the prior major aVWAP levels.
Market Internals – NYSE
Note how last week we really didn’t produce much positive action at the exchange level that qualifies as “notable.” To me this is fine as the market balanced, but it does speak to the concentration of semiconductors driving the market higher.
I would be much more concerned if the market balanced and the internals were bearish offering a divergence.
Market Profile
Note that value moved higher through the later half of the week. On Friday the breakout yielded a double distribution and the PoC closed in the upper. A weaker market would have left the PoC in the lower distribution, signaling a fake breakout and preparing for rejection early next week. Doesn’t mean that can’t happen, but not typically how a weak market will set up.
XLF – Financial Pose A Risk
Not really a great look on Friday with the weak consolidation under the 50% range of Thursday’s hammer. Like communications, pretty much needs to find a do or die higher low here and now early in the week, otherwise this too spells trouble. Remember… second heaviest weight sector.
XLC – Communications’ Bearish Break
Communications had a HORRIBLE Friday session breaking down over 1.4% and slamming into the daily 50 SMA while the market broke out. There never was a new all time high breakout in this sector.
As the container for META and GOOGL this ideally starts to shape up and find a higher low early in the coming week, otherwise trouble starts.
If you want the full take, including all of the nuance of breadth, risk appetite and much, much more, check out the weekend episode here:
Economic & Earnings Calendar
Main Events
- FOMC – Wednesday
- PCE Inflation – Thursday
- ISM Manufacturing PMI – Friday
Top watches: CLS, GLW, HOOD, BE, STX, TER, V, SOFI, MSFT, AMZN, META, GOOGL, QCOM, KLAC, MA, AAPL, SNDK, WDC, AXTI
Swing Stock Scans
Keep in mind where we are on the broader market. With the potential for pullback from the highest high, mind new long exposure before the index provides a higher low.
ABNB – Daily Chart
Breakout from the balance range with great action on Friday producing a look below and fail. So long as 140 continue to act as support, looking at this as a daily higher low setup.
ALM – Daily Chart
Short term cup with handle setting up a daily higher low and inside bar on Friday. Holds over 20.75 and followthrough over the 23.85 level should seek new highs.
ATI – Daily Chart
Revist from last weeks newsletter noting that we have a nice daily higher low opportunity now up against the daily 50 SMA with multiple inside days. Hammer action continues to indicate buyers stepping up near key moving averages.
FLS – Daily Chart – !! Mind Earnings !!
Inverted head and shoulders setting up a potential move back into pivot highs.
ITT – Daily Chart
Flagging action at the highs after a breakout. Loking for over 223.35 for new highs to be unlocked.
LITE – Daily Chart
A name we’re all familiar with at this point… Consolidation over the 20 SMA looking at a flat ish top base break. Seems like similar to SNDK its seeking the 1000 Livermore number.
SKYT – Daily Chart
Cup with handle after multi month consolidation. Looking for a higher low setup here to get back into the cup highs. From there looking to see if we can get a breakout in this smaller semiconductor company.