As earnings season kicks into high gear, bullish investors are crossing their fingers, hoping solid corporate results will halt the slide in technology shares that have cooled this year’s U.S. stock rally.The S&P 500’s technology sector has taken a nosedive, dropping nearly 6% in just over a week and wiping out about $900 billion in market value. The culprit? Growing expectations of interest rate cuts and the possibility of a second Donald Trump presidency are redirecting money away from this year’s tech darlings and into sectors on the sidelines in 2024. Despite the tech turbulence, the S&P 500 has managed to fare better, losing only 1.6% in the same period. Sharp gains in financials, industrials, and small caps have partly offset declines in tech. The benchmark index remains up more than 16% for the year like a ship sailing through choppy waters but staying on course.All eyes are now on parts of the ‘Magnificent 7’—Tesla, Microsoft, Alphabet, and Amazon—set to report their quarterly results this week. Investors are hoping these giants can help reverse the market’s recent weakness. This notion reflects the market’s resilience and potential for a strong rebound. The immediate trigger for the market pullback is renewed uncertainty about regulatory and trade policies post-November elections, particularly concerning export restrictions on semiconductor players.From a broader perspective, we’re in a seasonally soft period, so it might be wise not to overreact to the recent dip in the Mag 7 stocks, especially given their impressive runs. Should we be concerned about the geopolitical landscape? Absolutely !!! But we are in the micro widow, and the song remains the same each quarter, especially for the mega-cap companies driving the index. These corporate giants usually meet or exceed expectations with their financial results. They’ve become indispensable to everyday life and business. While they might occasionally miss a step, it’s rare to see them stumble badly. Calling a quarter “bad” often depends more on a Wall Street analyst’s whims than financial trouble.Corporate America looks set to clear this high bar, suggesting that earnings season might not be the absolute bear’s catalyst. The “AI 5” (Alphabet, Amazon, Meta, Microsoft, and Nvidia) boasts an impressive 17% sales growth. The question is what’s already priced in on their upswing and current downdraft. When Foggy Bottom politics are involved, the looking-glass lens is always cloudy.I recommended reducing SPX tech positions on July 11 (as noted in my market update) for no other reason than cross-asset behaviour.

For the first time in this rally, I think the equity market’s behaviour looks fragile, resembling a runner who’s sprinted to record heights and is now gasping for “breadth.” As all runners, including yours truly, know, when you hit the wall, you become disoriented and giddy and then, quite possibly, end up losing your lunch. Will stocks do the same?

After an exit call, I usually wait for at least a 5% correction before re-entering, ideally 10%. However, a surprisingly bad forward guide could drop the pain trade hammer; I wonder what could go wrong with CTA max long on the SPX.Although I can no longer access all real-time trading bank Prime Broker data, my analysis draws from experience with the Soc Gen CTA index. Even if CTAs are max long, the SPX is up +16% year-to-date. If they’ve captured at least half of this, they’re up 8% ( Soc Gen says + 7.22 %), suggesting they can weather a moderate downdraft.But with the recent clearout, we might be only about 3.5% from a significant pain point around 5325 on the SPX, potentially leading to a more substantial drop if CTAs switch to sell. This scenario is likely if broader recession signals emerge, indicating the Fed is behind the rate-cutting curve, price momentum shifts downward, and the VIX moves above 20. But for this week, if the mega-cap profits flag or AI-related spending falls short, it would challenge the tech dominance narrative and set the ball rolling downhill much faster. This data is from GS; while it is a bit dated, we have not hit any CTA sell level since the data was aggregated on July 16, so I can be considered current.More By This Author:Trade War 2.0: The Reckoning
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