So far, so good. We predicted a summer stall in the stock market, with bouts of volatility rather than a correction, and that is how June and July played out. The S&P 500 has gone nowhere since May 14, fluctuating around 7,500, while the market has churned underneath. The rotation of leadership among sectors that we expected has continued. Breadth has improved. Nothing in the past month has changed our view that the index should reach 8,250 by year-end.
The summer stall could last until the start of the fall. On the plus side for investors is Fabulous Earnings Momentum (FEMO). On the negative side for them are ongoing uncertainties about the AI business model, the Middle East war, the persistence of inflation, and the Fed's reaction function under Fed Chair Kevin Warsh. The net result so far has been a flat market with lots of volatility.
Such volatility combined with leverage can be fatal. Leopold Aschenbrenner's $45 billion hedge fund, Situational Awareness, blew up last week. He was forced to sell his entire book of public equities to Citadel after losses on his long positions in the AI trade triggered margin calls. This event undoubtedly contributed to last week's volatility, as did Warsh's lame first press conference; yet the S&P 500 rose 1.0% for the week!
S&P 500 Semiconductors contributed to the week's downside volatility, falling 3.4% (chart). On July 19, we wrote that the S&P 500 Semiconductors stock price index was likely to fall to its 200-day moving average.
Now let's take a deeper dive below the market's calm surface:
