The market has weakened considerably since our last note 2 weeks ago. The S&P has pulled back into the trading range between 7350 and 7500. Importantly, the 50-day moving average was breached last week, recovered and then breached again. The S&P has had much to digest with the renewal of tensions in Iran and a spike in both oil and interest rates. Support at 7350 is not particularly strong so a break below this level would not be entirely unexpected. Despite the weakness the decline has been orderly and not panic driven. Should tensions quell in the Middle East (again!) and oil and rates normalize, we could see a quick jump back near the highs of late May. We are watching closely and caution should be exercised.
The Nasdaq is more problematic. It has fallen more steeply as profit taking in the AI and chip stocks have driven the index down. It rests at a relatively important area today – the June lows and the small gap up in early May. Beyond the levels being tested today, the 100 day-moving average rests 2% below and will be a much more important line in the sand for the bulls. Earnings over the next couple of weeks will determine which way we go.
Our Point
While the S&P is just 2% off of its highs, the Nasdaq 100 is off more than 7%. The large tech stocks are taking the brunt of the recent weakness. The equal weighted S&P (RSP) is up 1% over the same time frame. The conclusion is profit taking in the tech sector, after a huge run-up earlier this year, and a re-allocation of risk to the staider names in the S&P. Will tech earnings reverse the current market thinking? Google and Tesla did nothing to alleviate fears of too much AI spending by the large tech companies as both got punished this week with strong but problematic earnings reports. Google was down 7% on their earnings and Tesla cratered nearly 15%. At this point today, neither have bounced so there may be more pain ahead for these two bellwethers. Next week will be a full one with more tech earnings from the likes of Microsoft, Meta, Apple and Amazon. Traders will be listening carefully to see if AI spending is translating into increased revenues and earnings. There will be a number of other important earnings, so the volatility of this week is likely to continue into next. The Fed will also be meeting next week with a rate decision on Wednesday. While it is highly unlikely for any rate movement, the market will be paying attention to Chairman Warsh’s comments and the dot plot compiled from all the members of the Fed. The recent spike in treasury yields increase the likelihood of rate hikes later this year rather than the expected cuts that were widely anticipated as we entered 2026. The Iran war and the subsequent uptick in oil prices is creating an inflation issue that the Fed will need to address if the war continues. There is speculation that the US will launch a major offensive this weekend. It would not be out of the ordinary as many of the major bombing campaigns have been done over the weekend to allow for the markets to digest before reacting. It seems as if the US has reached a pivot point in the war with the idea of ending it now rather than being strung along with promises of profitable negotiations. While we continue to believe that the longer-term effect on the markets will be minimal, the short-term effects have been painful at times. We have made no changes to our holdings, but several positions are nearing sell points. Next week will determine if we get a little defensive or continue to hold the line. We are in move mode with boxes and wrapped furniture everywhere in our current house. We will be moving on Monday with a close on our current Green Hills house next Thursday. We will be sad to move but excited about our new chapter. It’ll be a busy and sweaty weekend! Enjoy yours wherever it finds you.
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About Bo Bills
Founder and Chief Investment Officer at Bills Asset Management. With over 30 years of experience in managed risk investing, Bo has helped countless clients achieve their financial goals while preserving capital.
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