Just two weeks after warning that U.S. stocks required a meaningful technical reset, Scott Rubner, Chief Equity and Derivatives Strategist at Citadel Securities, now believes that reset is largely complete, with the market transitioning from being driven by positioning back to being driven by fundamentals.
In a recent report, Rubner stated, "The market we are entering is fundamentally different from the one we left two weeks ago." He noted that nine out of the ten market indicators he tracks have shown material improvement over the past two weeks, with his checklist "largely turning green." He sees retail investor demand remaining remarkably resilient, positioning-related headwinds subsiding, market leadership broadening, and valuations becoming more attractive as earnings season approaches.
The direct implication for markets is that the technical headwinds that previously weighed on U.S. stocks are systematically weakening. The core variable determining the next phase of market movement has shifted to the upcoming dense wave of second-quarter corporate earnings reports. Rubner clearly stated, "Flows got us here. Earnings determine the path forward."
Retail Buying at Record Levels, Structural Support Intact
Within Rubner's analytical framework, retail behavior is a primary observation, and current data shows this support is exceptionally strong.
According to his platform's data, there has not been a single day of net selling throughout July so far. The average daily net purchase size for the month is approximately 3.2 times the historical monthly average. July 2024 is currently the second-strongest month for retail net buying since January 2020 and the strongest July on record within this dataset.
For momentum stocks, the last week of June and the first week of July marked the two strongest weeks ever for average daily net buying of momentum long/short pairs on the platform, with net buying about 2.5 times the average over the past year. July 1st set a new single-day record for net buying in this pair, with purchases nearly 12 times the average daily amount of the past year.
However, signs of localized weakness have emerged in the semiconductor and hardware sectors. On the two most recent down days for the Philadelphia Semiconductor Index (SOX), retail investors sold related stocks—a rare departure from the consistent "buy-the-dip" behavior seen in this cycle. But Rubner points out that sharp rebounds followed each decline, and the SOX has shown strong forward returns over the subsequent 30 trading days.
Positioning Pressure Eases Systematically, Market Stress Remains Idiosyncratic
On a technical positioning level, Rubner assesses that market stress is idiosyncratic rather than systemic.
Hedging demand is increasingly concentrated at the individual stock level beneath the index surface, rather than spreading to the broader market. Skew for broad indices and ETFs remains contained—the one-month 25 delta put/call skew for the S&P 500 is only at the 10th percentile over the past year, while the skew for the SOX is at the 94th percentile. This highlights that hedging demand is highly focused on growth-oriented exposures like semiconductors, not the overall market.
In the leveraged ETF space, assets under management have contracted by about 10%, from roughly $218 billion to $198 billion, reducing the magnitude of systematic rebalancing flows. Semiconductor-related leveraged product AUM shrank by about 20%, technology (ex-semiconductors) leveraged ETF AUM fell by about 5%, and other leveraged products declined by about 2.5%.
Financing conditions have improved concurrently. The one-month stock loan spread has narrowed significantly from a recent peak of SOFR +138 basis points to around 60 bps, sitting at about the 61st percentile over the past year, lowering the cost of maintaining long exposures.
Furthermore, Rubner notes a structural signal: the spread between VIXEQ and VIX has reached a record high, while implied correlation is near historic lows. This means the current market is driven by stock selection rather than macro beta, with dispersion, not overall market direction, being the defining feature.
Leadership Broadens, Tech Valuations Below Decade Average
The change in market leadership structure is another key reason for Rubner's shift in stance.
The S&P 500 is up about 1% month-to-date, but technology stocks have lagged. Gains have been primarily driven by sectors that underperformed in the first half of 2024, with Communication Services and Financials particularly standing out.
This rotation is especially evident on down days for the index. Since early June, on 14 down days for the S&P 500, a majority of index constituents closed higher on 9 of those days (64%). Over the past year, this ratio was only 32%. The average number of advancing constituents on down days has nearly doubled—in the last 20 S&P 500 declines, an average of 239 constituents closed higher, compared to a 20-year historical average of just 133.
On valuations, despite the S&P 500 being less than 1% from its all-time high, the forward P/E ratios for the S&P 500 Information Technology sector, the Nasdaq 100, and the S&P 500 Semiconductor & Semiconductor Equipment industry are all below their respective 10-year historical averages. Rubner notes that some of the market's highest-quality growth companies are entering earnings season with valuation support, not valuation pressure.
Earnings Remain the Sole Uncertainty, Semiconductor Reports Become 'Index-Level Event'
In Rubner's ten indicators, the only one not yet "green" is whether earnings can meet expectations.
The market currently expects S&P 500 index Q2 earnings per share to grow 22.4% year-over-year—if realized, this would be one of the strongest earnings growth rates in history outside of major recession recoveries. Notably, despite valuation pullbacks, earnings estimates continue to be revised upward, extending the trend seen ahead of the Q1 reporting season.
The final week of July will be the "Super Bowl" of Q2 earnings season. An estimated 36% of S&P 500 market cap and 33% of Nasdaq 100 market cap, including 4 of the "Mag 7" companies, are scheduled to report. By the end of July, roughly 60% of S&P 500 constituents are expected to have reported.
Concurrently, corporate buyback windows are gradually reopening, which will reintroduce the market's largest structural buyer to equities.
The importance of semiconductor earnings is particularly pronounced. The semiconductor industry now accounts for about 18% of the S&P 500 index weight, compared to just 3% a decade ago. Meanwhile, the average three-month implied volatility for the ten largest semiconductor companies has risen from 29% in 2016 to nearly 73% currently. Rubner points out that semiconductor earnings are not concentrated in a single week but are spread across the entire earnings calendar, meaning event risk will persist through the rest of July and all of August. "Semiconductor earnings are no longer just a sector event. It has become an index-level event."
Rubner's conclusion is that the technical reset is largely complete, and the next two weeks will test whether fundamentals can support a continuation of this rally.
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