Semiconductor Stocks Test Critical Support Levels

It was a mixed day of trading, even though the S&P 500 finished essentially flat. Semiconductor stocks were hit hard, with the SMH falling nearly 3% at one point.

The SMH appears to be at risk as it tests support around $550, which looks to be the neckline of a potential head-and-shoulders pattern. The options market put wall for SMH sits near $520, while the next major technical support level is around $510. That makes the $510-$520 area the most likely downside target if the current pullback continues.

Nvidia’s announcement overnight that it is guaranteeing up to $250 billion for OpenAI’s data center expansion didn’t appear to be well received by the credit market. The company’s 5-year CDS spread widened again today, reaching 79.5 basis points. The stock also came under pressure, suggesting that, at least today, the widening in credit spreads is beginning to be reflected in the share price.

The same technical pattern seen in the SMH is also present in Micron, with a similar neckline around $870. However, Micron’s options put wall sits much lower, around $800, roughly 10% below the current share price. That suggests Micron has significantly more downside potential if the neckline support fails.

The rest of this week is packed with potential market-moving events, including earnings from Microsoft, Amazon, Meta, and Apple, as well as the FOMC and BOJ meetings and the release of the PCE inflation report.

On top of that, Treasury Tuesday brings $70.5 billion in T-bill settlements, followed by another $38.5 billion on Thursday. That combination of heavy Treasury settlements, major earnings, central bank meetings, and key economic data is likely to make for a challenging week for risk assets. With another wave of important economic data due in the first week of August and additional liquidity set to leave the financial system, next week may not prove much easier.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Glossary by ChatGPT

BOJ (Bank of Japan): Japan’s central bank, responsible for setting monetary policy and interest rates.
CDS (Credit Default Swap): A financial contract that reflects the market’s assessment of a borrower’s credit risk.
FOMC (Federal Open Market Committee): The Federal Reserve committee that determines U.S. monetary policy.
Head-and-Shoulders Pattern: A technical chart formation that can signal a potential reversal from an uptrend to a downtrend.
Liquidity: The availability of cash and funding within the financial system that supports trading and investment activity.
Neckline: A support or resistance level in a chart pattern whose break often confirms the pattern.
PCE Inflation Report: The Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred measure of inflation.
Put Wall: An options strike with significant put open interest that may act as a potential price support level.
Risk Assets: Investments such as stocks and high-yield bonds whose prices are more sensitive to economic and financial conditions.
SMH: The VanEck Semiconductor ETF, a widely followed exchange-traded fund tracking the semiconductor industry.
T-Bill (Treasury Bill): A short-term U.S. government debt security with a maturity of one year or less.

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