Coiled Spring Capital MW 7/9/25

Breaking Up Is Easy (At Least in Markets)

We’ve all heard it before: “It’s not you, it’s me.” Breaking up in life can be messy. But when it comes to the stock market, the opposite is true—breaking up is actually easy. Why do we say that?

Let’s go back to the theme of our June 29 report, Don’t Fight the Inertia. A market in motion tends to stay in motion. In technical terms: markets trend. And when they do, pauses, consolidations, and mild pullbacks all serve the same purpose—they reset the clock by wringing out excesses. More often than not, these pauses resolve in the direction of the prevailing trend.

That trend, as it stands, has been bullish. Following the February peak and the so-called “bear market drawdown,” we’ve seen a strong continuation to new all-time highs. Does it make rational sense? Maybe, maybe not. But that’s not our concern. Our focus is on staying aligned with the trend, and until we see a material shift, we remain on that path.

So yes—breaking up out of a bullish pattern is easy and actually expected. What’s not so easy is convincing the stubborn perma-bears who’ve been fighting every step of this rally since the April lows. In that sense, “it really is you, not me.”

Heading into this week, we expected the market to consolidate, but viewed any weakness as shallow and buyable. Three days in, that’s playing out. Macro headline risk has been absorbed, and the SPX is holding trend. In fact, it’s on track to print an “inside week”—the textbook definition of healthy consolidation.

Of course, we’ll see how the rest of the week unfolds—but so far, if you followed our guidance and bought the dips rather than chasing strength, it’s been a rewarding approach.

As we often do at the start of a new quarter, we like to check in on early sector leadership. It’s not just a scoreboard—it often provides a reliable roadmap for how the quarter might shape up. So far in Q3, the leadership board features Energy, Materials, Tech, and Industrials. That rotation offers valuable insight into what the market is favoring beneath the surface.

There’s been growing concern that inflation could reaccelerate this summer, particularly as tariffs begin to filter through and impact prices. If that’s the fear, then it makes sense to see commodities leading—historically, they tend to outperform in inflationary regimes. Technology also has a track record of doing well in such environments, especially when growth remains resilient.

While there’s no guarantee this leadership will persist, it does reinforce our view that a summer correction remains possible. However, it may take a macro catalyst—like a hotter-than-expected CPI print or policy surprise—to ignite that fear.

For now, the Goldman Sachs Stagflation Basket continues to drift lower, offering no clear signal. That said, it remains deeply oversold and structurally set up for a potential reversion—something worth watching as the macro tape evolves.

Another lens we like to use for evaluating sector leadership is relative performance against the benchmark. The chart below shows the Materials sector (XLB) versus the SPY. For the past three years, this ratio has been locked in a persistent downtrend—marked by a classic sequence of lower highs and lower lows.

That trend may now be changing. The recent higher low came alongside notable RSI and MACD divergence, signaling a potential shift in momentum. It’s early, but if this reversal holds, Materials could make up lost ground in Q3 and emerge as a source of alpha going forward.

If you acted on our semiconductor rotation call from the 5/21 report, you likely outperformed the market by 2–3x. While we don’t expect that level of outperformance to repeat in the near term, we do believe there’s still room for catch-up—and the setup suggests continued opportunity for selective gains.

So why Materials? It’s not just about the sector in isolation—it’s about anything with a negative correlation to the U.S. dollar (DXY), which has been in a steady downtrend. Recently, the DXY broke major support around the 100 level and has continued lower, slipping through the key 61.8% Fibonacci retracement. That kind of break often suggests the move is more than just a correction—it points to a deeper trend shift.

In case you’re wondering, the inverse correlation between Materials and the U.S. dollar has been especially pronounced over the past two years—and we expect that dynamic to persist.

Technology, Industrials, and Commodities also tend to benefit from a weaker dollar, as their foreign revenues translate into more U.S. dollars when converted back. That tailwind becomes especially important when the dollar is under pressure, as it has been recently.

Just look at Copper. Yesterday, following Trump's renewed tariff threats on imports, Copper posted its largest single-day gain on record—hitting an all-time high in the process. While the news may have sparked the move, the underlying setup was already pointing toward higher prices. In other words, the breakout likely had more to do with structural forces than headlines alone.

Another risk-on asset that tends to thrive in a weak dollar environment? Bitcoin—and the broader crypto complex. Bitcoin broke out to a new all-time high on Wednesday, a move we’ve been anticipating in our recent reports. Like commodities, Bitcoin often responds positively to dollar weakness and inflationary expectations, making it another beneficiary of the current macro backdrop.

We think you get the picture: the market is rotating—and rotation is inherently bullish. While the indices have gone mostly sideways this week, leadership beneath the surface is starting to emerge. Certain groups are beginning to shine, and from our vantage point, a new trend may be in the early stages of taking hold.

Now let’s check the charts.

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