Coming into the summer we had one persistent worry: margin debt. Leverage and speculation had climbed to levels that looked unsustainable, and historically that kind of build-up resolves itself the hard way. We expected a “June swoon” — June is often the softer summer month while July tends to be stronger. This year it arrived a month late.
July’s pullback did exactly what an unwind does: it flushed a great deal of that leverage out. Roughly $60–100 billion came out of the leveraged ETF market in a single month. Margin debt remains elevated and stays on our watch list, but it is no longer the outlier it was.
The decline was concentrated rather than broad. The semiconductor index — about 19% of the entire S&P 500 — fell roughly 30% in a single month. South Korea’s index, home to the world’s two largest memory manufacturers, fell about 35%. And leveraged semiconductor products, which move at three times the index, corrected on the order of 70%.
People have been asking whether the bubble is going to pop. In that corner of the market, it already did. That’s also the explanation for the whiplash — up one day, down the next — that made the month feel chaotic on television.
The other side of the barbell is earnings, and earnings kept climbing. When profit growth is accelerating, it’s difficult to turn broadly pessimistic over short-term booms and busts inside individual sectors. The trend confirmed it: the long-term trend on both the S&P 500 and the Nasdaq stayed above the red line the entire time. The shorter-term momentum trend did flip negative for about two weeks — unsurprising given the rotation underneath — and has since turned favorable again.
Volatility stayed contained. More importantly, the dollar pulled back sharply. We had flagged in previous episodes that a dollar above roughly 100.50 would start pulling liquidity out of markets — and markets run on liquidity. That pressure eased considerably. The 10-year yield is a touch higher than we’d prefer; we’d like to see it below 4.5%, though it has come off its highs, and as long as it isn’t making new highs we’re comfortable.
This is the development worth paying attention to. Improving liquidity plus widening earnings growth has produced participation across far more of the market than we’ve seen in a long while. The Dow currently looks stronger than the S&P 500, which looks stronger than technology — a reversal of the pattern that dominated recent years, and a sign technology still has work to do while financials, industrials and base metals strengthen. Value, small caps, and international markets are all showing favorable trends, with international breaking out of a long-term base.
With the major domestic indexes, small caps, and international all trending favorably at the same time, and earnings still growing, the underpinnings for a broad-based advance look better than they have in some time. As always, that view holds only as long as the trends do.
Hi everybody, and welcome to the July 2026 recap. This is our sixth or seventh webcast, and we’ve got a lot to cover today — there’s been a lot of activity, and we closed July and started August really well.
Over the last couple of months the market’s been shaky. The Iran war kept going back and forth, and a lot of the macro concerns we had weren’t really improving. We had this margin debt slide I’m showing you now. Margin debt was getting astronomical — the leverage and speculation were so high it was becoming very worrisome.
So we thought there was going to be some kind of a “June swoon,” because June has historically been associated with summer pullbacks while July has generally been a good month. This year, of course, June was a good market and we had the July swoon instead. With margin debt getting out of hand, the pullback — and in some cases the crash — that happened in July wiped a lot of that margin debt out of the way. It’s still high, so it remains a point of contention for us, but we’re not nearly as concerned as we have been. We’ve seen roughly $60 to $70 billion, maybe $100 billion by now, come out of the leveraged ETF market last month alone. That was a pretty big shakeout, which is part of why the market trends turned favorable again.
Here’s the semiconductor index. It did incredibly well — and that was part of the speculation fueling all that margin debt. Sure enough, in July we had quite the swoon. The semiconductor index, which represents about 19% of the whole S&P, had a 30% drop. So if you saw a lot of activity last month — one day up, the next day down — this is probably the culprit. A 30% one-month drop in a major sector of the market.
Same thing with the South Korea index. The reason I bring up South Korea is that it’s home to the two largest memory makers in the world. The leverage got way overdone, and the South Korea index dropped about 35% over 30 days. That wipes out quite a bit of the speculation and the bubbly feeling that was in semiconductor stocks.
This is the leveraged semiconductor ETF — these funds give you a three-times move, up or down, of the index itself. One of those problem areas we thought was getting too bubbly had a correction of about 70% for the month. I had conversations over the last week where people asked, “Do you think the bubble’s going to pop?” The bubble popped. When you have leveraged ETFs down 70% in a month, that’s a bloodbath. We definitely saw a lot of the froth we were worried about come off the table.
The bright spot — the other side of the barbell, as we like to say — is earnings. Earnings keep climbing. When earnings are climbing like they are now, it’s really hard to get overly pessimistic outside of short-term booms and busts within certain sectors. The overall market fundamentals are extremely strong and earnings growth continues to rise. As long as earnings keep climbing, we’re going to remain optimistic — as long as the trend is favorable.
Here’s our red line. We love the red line, and it’s clearly favorable. Notice we did have a little shakeout along with everything else last month. Here’s the red line on the Nasdaq — clearly favorable here as well, again with last month’s shakeout.
And here’s the momentum trend, where you can see the shakeout a bit better. Our momentum trend actually went negative for a couple of weeks — not surprising given all the internal rotation and semiconductors taking such a big hit. After that shakeout, and with earnings where they are, the momentum trend is clearly favorable once again. We like to see that. The Nasdaq doesn’t look as strong as the S&P, just because there’s still leverage that probably needs to be unwound, but it’s really shaping up.
Let’s look at our macros. We follow the VIX — volatility is completely contained, no problem. The US dollar has been big. As you know from the last several webcasts, I said this could be a problem: above 100.50, it takes liquidity out of the markets, and the market loves liquidity. What we’ve seen is a very sharp pullback in the dollar over the last couple of weeks, which is very favorable for liquidity conditions. Because liquidity has improved and earnings growth continues to broaden, we’ve seen many different areas of the market increase their positive trend and positive money flows.
The 10-year yield is a little higher. We’d like to see this under four and a half, but we’re okay — it’s come off its highs. As long as we don’t keep making higher highs, we’re fine. It’ll be hard for rates to come down too much until oil really starts coming down, but we’re not running away here.
With earnings growing like they are, the trend picking up, and the dollar pulling back and feeding liquidity, we’re seeing diversification in the market and trends broadening out like we haven’t seen in a very long time. We’re enthusiastic. Value looks excellent, with a favorable momentum trend and a group of stocks making higher highs and higher lows.
Here’s the Dow. The Dow looks a lot better than the S&P, and the S&P looks a lot better than technology. What does that tell you? Technology still has a bit of a struggle. But these other groups — financials, industrials, even some base metals — continue to act great.
Small caps had a little shakeout last month, but the trend looks outstanding and the momentum trend is back in the favorable category. That’s exactly what we’re looking for. And international is breaking out of a long-term base, which is really something. So for the first time in a long time we’ve got the Dow, the S&P, the Nasdaq, small caps, and international all trending favorably. As long as those trends remain favorable and earnings growth keeps going, we’ve got very solid underpinnings for a broad-based market rally.
We also review our M5 momentum rankings each month, and this month there’s a good deal of continuity from the prior list — which is what we like to see, since it lets a longer-term trend materialize. The semiconductor names on the list went through a rough patch with the sector, but the longer-term trends and earnings growth there remain intact, so we’re giving them room. The notable change is the addition of a large financial — and that speaks to the broadening we discussed. It’s hard for the market to struggle long-term when the banks look as healthy as they do right now.
That’s it — I tried to talk fast. We don’t like to keep you long on these, but we want to give you a heads-up on what we’re thinking, what we’re doing, why we’re doing it, and of course show you the picture of what the trend actually looks like. As always, if you have any questions, shoot us an email. We’re happy to go over this with you and do a private Teams call any day of the week. Have a great day.
The Red Line shows what the market is doing. Our strategy page shows what we do about it.
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