Party's Over...It's Time for Summer
Premium Section: Updated S&P 500 Cycle Forecast to Year-End
On Friday, the S&P 500 (SPY) fell 2.58%, while the SOXX Semiconductor Index (SOXX) dropped 10.44%, with both declines occurring on heavy volume.
We suspect that hedge funds and traders took profits from the AI-driven rally and decided to start their summer vacations early.
Our Premium Subscribers we’re ready for this profit-taking event as they were for-warned on May 18th here. In the Premium Section we provided Cycle Forecasts to the end of June and you can see from the picture below, our Cycles Composite (blue) had a high on June 4th followed by a down-cycle until June 26th.
What’s Changed Fundamentally?
There are some important fundamental changes in the market that are throwing water on this rally:
Interest Rates - As the jobs report came in strong on Friday, the 10-Year Treasury Rate (TNX) spiked above 4.5%, a key level. There is now an expectation that the Fed will raise rates, and this is compressing the stock market.
Iran War - The US and Iran are in a classical “impasse”. Both sides are stonewalled at key negotiation points and neither are willing to budge. Meanwhile the oil reserves of countries are running low. The expectation that the Iran War would pass quickly is now changing.
AVGO Earnings - On Wednesday, Broadcom sank 13% after CEO Hock Tan declined to raise the company’s $100 billion full-year AI chip revenue target. That guidance hold—not a miss—triggered a 13% selloff in a mega-cap semiconductor name. That’s a market that has already priced in accelerating growth, where anything short of perfection is being punished.
End of Earnings Season - With earnings season coming to an end, the market will focus on macro instead of micro and the macro picture is not great.
Technical Conditions are Weakening
The chart below tells the whole story of the market:
Trend - The SPY has pulled back to its 30 SMA (green), a level that must hold if this remains a strong rally. In previous advances, as long as the 30 SMA held, the market retained enough momentum to push to new highs. When the 30 SMA failed to hold and price instead found support at the 50 SMA (pink), the rally became weaker and more choppy. The recent low of $731.53 is also a critical level. If it is broken, the trend will officially shift to a pattern of lower lows.
Support Levels - The Volume Profile shows significant volume support at the $733, $710 and $684.
Indicators - The trend is weakening as the DMI and MACD made bearish crossovers, telling us that the SPY is now in a downtrend and downside momentum is increasing. The RSI is now below 50, further signaling weakness.
Breadth - Breadth is weak and not supportive at the moment, increasing the probability of further downside. The McClellan Oscillator and McClellan Summation Index are both negative. There are still Net New Highs, but that number is waning.
Dispersion - Dispersion (DSPX) is declining from a recent high, suggesting that the market is beginning to focus more on macro factors. This is normal after earnings season ends. A declining DSPX means that stocks tend to move together in a more highly correlated fashion. If a market downtrend begins while dispersion continues to fall, a "sell-everything" decline could be around the corner, as correlations across stocks increase and selling becomes more broad-based.
Volatility - The VIX Curve is at 1.01x, close to breaking below the 1.00x level. When that happens that often tells us an unexpected event or Black Swan event is around the corner. Investors should wait until this curls up before adding long equity exposure. The VIX is now 21.51, above the 20 level, which should cause many money managers and traders to reduce overnight equity exposure.
Options Sentiment: The 8 EMA of the Put/Call Ratio (CPC) is a reliable oscillator. When it falls to the 0.7 area, the market tends to be overly bullish (buying Call Options) and due for a pullback. When it rises to the 0.9–1.0 area, the market is often overly bearish (buying Put Options) and due for a rally. It reached 0.7 on June 2nd, which marked the recent top. Now that the market is pulling back, we’d like to see this indicator move higher before becoming more confident in buying the dip.
Fund Flows - We can see that fund flows have stalled for the moment, suggesting investors are waiting for a better opportunity to increase their buying.
Did a Wedge Drop Occur?
Remember the Oliver Kell Price Cycle?
Friday was a possible Wedge Drop, potentially signaling the start of a downtrend. That is unless price re-claims the 21 EMA (blue) next week. The chart below shows the uptrend in 2025, where you can see that price broke below the 21 EMA a few times and reclaimed it quickly to continue the uptrend.
The Nasdaq 100 (QQQ) had a more drastic drop as it sliced through the 21 EMA and closing on the lows.
The key to this rally are the Semiconductors (SOXX). Similar to SPY and QQQ it broke below the 21 EMA on heavy selling volume. However the SOXX is closer to the 21 EMA, making it an easier reclaim if buyers show up next week.
Conclusion: We had a good run
With earnings season coming to a close, the indexes are breaking below their 21 EMAs, dispersion is declining, and the market is refocusing on macroeconomic factors. As a result, I believe there is a good chance that this rally has run its course. The market may begin a new downtrend or enter a choppy consolidation phase before a bona fide downtrend develops. Either way, it is time to protect profits and regroup for the next major opportunity.
In the Premium Section we’ll provide our updated S&P 500 Cycle Forecast extending out til the end of 2026. The Cycles Composite has been quite accurate this year and believe it will serve as an excellent guide for the rest of the year.
Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts. All sales are final.