Amid a significant tech sell-off and concerning macro data, markets are displaying classic signs of rotation rather than panic. Here’s what the charts and data suggest for the road ahead.
Fundstrat’s Tom Lee has posited that the S&P 500 could rally to 7,000 by year-end, a call predicated on two key factors: a potential dovish pivot from the Federal Reserve and a recovery in the ISM manufacturing index. However, this bullish outlook faces immediate tests, including the upcoming Jackson Hole Symposium and a historically volatile seasonal period for equities.
The market is currently contending with a series of dark macro undercurrents that, while not yet causing a broad market seizure, warrant close monitoring:
- Falling US Shipments: A sharp decline suggests potential softening in domestic demand, likely exacerbated by tariff policies.
- Housing Market Pressure: Home prices fell in 39 major US metros in July, the highest number since 2012, indicating consumer strain from higher-for-longer interest rates.
- Rising Delinquencies: Credit card and auto loan delinquencies are climbing towards recessionary levels, a unique situation given the current strong employment picture.
- Surge in Bankruptcies: Particularly in the EU, business failures are hitting new highs, a stark contrast to the boom in new business registrations seen in 2022-23.
Despite these concerns, market internals suggest a healthy rotation is underway rather than a broad-based crash. The equal-weight S&P 500 (RSP) is near all-time highs, and sectors like healthcare have become top performers over a five-day period. This indicates capital is moving out of the concentrated, high-flying tech trade—epitomised by the 25% drop in Palantir—and into other areas of the market.
The technical picture provides key levels to watch. The S&P 500 found support at 6,375, closing just above the critical 6,400 level. A sustained break below 6,400 could trigger negative gamma exposure and open a path down to 6,200, with 6,000 acting as a major options support level for September expirations. The Nasdaq 100 also dipped to a key trendline, finding a bid; a break below its current equilibrium could see a move towards 21,700.
In cryptocurrencies, volatility has returned with a sharp sell-off. Bitcoin is holding a crucial level at $112k; a break below could see a test of support near $105k or even $98k. Historical having cycles suggest such a drop could potentially set the stage for a subsequent rally and altcoin season, but this is not guaranteed.
Actionable Steps for Investors
- Monitor Key Levels: For equities, watch S&P 500 6,400 and Nasdaq support. For crypto, watch Bitcoin’s $112k level.
- Embrace Rotation: The rally appears to be broadening. Review sectors like healthcare and value, which are showing relative strength.
- Assess Jackson Hole Impact: Fed Chair Powell’s commentary could significantly alter the interest rate cut narrative that underpins the bullish year-end forecast.
- Maintain Perspective: Even a larger correction of 7-10% in major indices would not break their primary weekly and monthly uptrends, presenting potential opportunities.
While macro headwinds are building, the market’s current behaviour aligns with a healthy consolidation and sector rotation within an ongoing bull cycle. Prudent investors should focus on the underlying technical and options flow data to navigate the anticipated volatility through the end of the third quarter.