U.S. equity markets have shown unexpected toughness in the face of recent macro disruptions, yet parts of the market are now appearing fragile, according to BTIG strategist Jonathan Krinsky.
Krinsky highlights that the S&P 500 has withstood shocks that, a week earlier, would have seemed likely to push the index markedly lower. He points to a combination of a sharp rise in oil prices and a weak jobs report as the primary stressors: West Texas Intermediate crude moved from about $67 per barrel to roughly $92 per barrel, and nonfarm payrolls printed -92,000 versus a 55,000 consensus.
"If you told us a week ago that WTI crude was going to go from $67/bbl to $92/bbl and nonfarm payrolls would print -92k vs. 55k consensus, we would have said SPX would be firmly below 6,700. Yet it held up fairly well after two downside tests of 6,700," Krinsky wrote in a Sunday note.
Still, Krinsky says confidence in the S&P 500's ability to maintain that level has eroded. He warns that a clear break beneath 6,700 could open the path to a test of the 200-day moving average near 6,582, which would imply roughly another 3 percent of downside from the 6,700 level.
Energy markets, Krinsky adds, have moved to rare extremes that may carry broader implications for equities. At one point last Friday, WTI crude traded about 45 percent above its 200-day moving average - a magnitude only seen during a few periods over the past four decades, he notes, and one that in prior cases corresponded to relatively short-lived rallies.
Credit markets also show signs of widening stress. Investment-grade spreads have expanded to their weakest levels since last spring, and concerns in private credit are increasing. Krinsky suggests that further deterioration in these credit conditions could coincide with a renewed leg lower in the S&P 500.
Within equity sectors, banks have so far managed to hold their 200-day moving average, but Krinsky describes the broader financials complex as "clearly weaker" because of exposures to insurance and private credit businesses.
Sector leadership is mixed. Software stocks have recently outperformed, with the IGV software ETF rallying more than 7 percent last week and potentially having room to move toward the $95 to $100 range, according to Krinsky. Semiconductor stocks, by contrast, appear to be losing momentum after an extended rally; Krinsky expects software to outperform semiconductors over the coming months.
Within semiconductors, memory manufacturers stand out as particularly vulnerable. Krinsky says the memory names look "quite vulnerable" after forming what he describes as a small top and having a long way down before encountering meaningful support. He points to specific names that currently appear precarious: SanDisk, Micron Technology, Western Digital and Seagate.
Takeaway - The S&P 500's recent resilience has not removed key downside risks. Elevated oil prices, a weak payroll print, widening credit spreads and concentrated weakness among memory chip makers and parts of financials create a constellation of vulnerabilities that could feed through to broader equity performance should core support levels fail.