When the chips are down

For a second week in a row, the stock market hit a speed bump in the form of a sharp tech sell-off. But unlike two weeks ago, the latest episode lasted more than a day, and it sent the S&P 500 (SPX) to just its third down week since April 19.

Last Wednesday the SPX pulled back from its latest record high as semiconductor stocks such as Nvidia (NVDA) and ASML (ASML) led a wider tech downturn. Follow-through weakness on Thursday and Friday left the SPX at its lowest level since July 2:

The headline: Tech slump follows through, election season heats up.

The fine print: With the news cycle increasingly dominated by the presidential election, Morgan Stanley & Co. analysts offered a word of caution for traders. Financial markets, they note, have started to reflect the possibility of a Trump presidency.¹ But in addition to the unpredictability of the election itself, the strategists note that investors’ assumptions about the eventual winner’s policies—and their impact on markets—may not be accurate.¹

The move: The Philadelphia Semiconductor Index’s (SOX) 6.8% decline last Wednesday was its biggest one-day loss since March 2020.

The number: 0%. Last Tuesday’s retail sales report came in unchanged for June—stronger than estimates, but still weak enough to support the narrative that a slowing economy will lead to a September rate cut.

The scorecard: For the second-straight week, the small-cap Russell 2000 (RUT) led the market and the Nasdaq 100 (NDX) tech index trailed it:

Sector returns: The strongest S&P 500 sectors last week were energy (+2%), real estate (+1.2%), and financials (+1.2%). The weakest sectors were tech (-5.2%), communication services (-2.9%), and consumer discretionary (-2.7%).

Stock movers: Chuy’s (CHUY) +48% to $37.34 on Wednesday, Hawaiian Electric (HE) +37% to $17.51 on Friday. On the downside, 4D Molecular Therapeutics (FDMT) -32% to $18.20, and Five Below (FIVE) -25% to $76.50, both on Tuesday.

Futures: Friday’s 3.1% sell-off left September WTI crude oil (CLU4) down more than $2.25 for the week at $78.64. After closing at an all-time high last Tuesday, August gold (GCQ4) pulled back (including a 2.2% decline on Friday) to end the week down roughly $20 at $2,399.10. Week’s biggest gains: July bitcoin (BTCN4) +16.5%, July ether (ETHN4) +12.9%. Week’s biggest declines: September copper (HGU4) -7.8%, September cocoa (CCU4) -7.6%.

Earnings season kicks into second gear this week, with Alphabet (GOOGL) and Tesla (TSLA) among the heavy hitters reporting their numbers. Here’s a sample:

●Monday: Verizon (VZ), Agilysys (AGYS), Cleveland-Cliffs (CLF), Logitech (LOGI), Medpace (MEDP), NXP Semiconductors (NXPI)
●Tuesday: Quest Diagnostics (DGX), Freeport-McMoRan (FCX), GE Aerospace (GE), General Motors (GM), Kimberly-Clark (KMB), Coca Cola (KO), Lockheed Martin (LMT), Spotify (SPOT), United Parcel Service (UPS), Enphase Energy (ENPH), Alphabet (GOOGL), Mattel (MAT), Tesla (TSLA)
●Wednesday: Check Point Software (CHKP), Fiserv (FI), General Dynamics (GD), Silicon Laboratories (SLAB), Old Dominion Freight (ODFL), AT&T (T), Chipotle (CMG), Ford (F), International Business Machines (IBM), Meritage Homes (MTH), Newmont (NEM), O'Reilly Automotive (ORLY)
●Thursday: American Airlines (AAL), AbbVie (ABBV), Dover (DOV), Honeywell (HON), Keurig Dr. Pepper (KDP), Southwest Airlines (LUV), Martin Marietta (MLM), Northrop Grumman (NOC), RPM (RPM), Verisign (VRSN)
●Friday: Aon (AON), Bristol-Myers Squibb (BMY), Colgate Palmolive (CL)

The first look at Q2 GDP highlights a busy economic calendar:

●Monday: Chicago Fed National Activity Index
●Tuesday: Existing Home Sales
●Wednesday: S&P Global Manufacturing and Services PMIs (flash), New Home Sales
●Thursday: GDP (Q2, initial estimate), Durable Goods Orders, weekly jobless claims, retail and wholesale inventories (advance), trade balance in goods (advance)
●Friday: Personal Income and Spending, PCE Price Index, consumer sentiment

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

Last week didn’t just feature the biggest one-day pullback for chip stocks in more than four years, it was also the SOX’s second-biggest weekly decline (-8.8%) of the past two years. (The biggest, -9.2%, occurred in April of this year.)

While the SOX has made a fair number of similar moves over the past 30 years—172 other weekly declines of 5% or more—most of them didn’t immediately follow a significant high, as was the case last week. For example, there have been only 35 other weeks the SOX fell 5% or more after an up week that was also the index’s highest high in at least four weeks.²

The SOX’s performance after these down weeks was mixed. The chip index was more likely to close higher than lower each of the next two weeks, but more likely to lose ground in the two weeks after that. Overall, after four weeks, the SOX was lower 18 times and higher 17 times.

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¹ MorganStanley.com. Navigating Market Reactions to the News Cycle. 7/17/24.
² All figures reflect Philadelphia Semiconductor Index (SOX) weekly prices, 1994-2024. Supporting document available upon request.