Is the AI bull market in jeopardy? The Philadelphia Semiconductor Index breaks below the critical support level of 11,200

Article author and source: Max, Wall Street Journal

U.S. semiconductor stocks now stand at a crossroads between technical and fundamental drivers.

With the SOX index teetering around a critical support level and facing multiple headwinds—including growing skepticism about the quality of AI-driven demand—the market is on high alert regarding the next move in tech stocks.

On Tuesday, July 28 (U.S. Eastern Time), the SOX index plunged more than 6.5% during early U.S. trading hours, breaching the 10,800 mark before paring losses by midday and closing down approximately 4.5%. Memory chip stocks continued their steep decline that day, with SanDisk (SNDK) falling over 10% intraday, while Micron (MU), SK Hynix ADR (SKHY), Western Digital (WDC), and Seagate Technology (STX) all dropped more than 10% at one point. Performance among AI chip giants was mixed: AMD also fell over 10% intraday, while NVIDIA declined nearly 2% in early trading before recovering slightly into positive territory.

As chip stocks broadly continued to underperform the broader market,the SOX index broke below its short-term key support near 11,200 intraday and closed below this level—a threshold it had successfully held during the sell-off on July 17.However, technical conditions have since continued to worsen—the 21-day moving average has crossed below the 50-day moving average, forming a short-term bearish signal. Meanwhile, renewed concerns about the cyclicality of AI-related capital expenditure have further dampened investor sentiment.

The semiconductor sector drove global markets higher in the first half of this year, as investors bet it would be the biggest beneficiary of the massive wave of AI spending. However, as many of these positions have been unwound, the sector has borne the brunt of the recent wave of intense selling.

Venu Krishna, U.S. equity strategy head at Barclays, commented: 'Concerns around funding uncertainty, rising capital expenditures, and the free cash flow situation of large tech companies have become focal points for the market.'

Marija Veitmane, head of equity research at State Street, described the current sell-off as a 'spiral decline.' She noted, 'The market is concerned about additional borrowing and capital expenditures, as well as the sustainability of such spending. Negative momentum is building.' However, she added, 'Looking at companies that have already reported earnings, demand remains extremely strong... For us, this presents a good opportunity to buy on weakness.'

From a market structure perspective,institutional positioning has normalized, with the previously crowded 'long semiconductors, short Mag 7' trade largely unwound, resulting in cleaner positioning.Seasonal factors are also turning favorable; historically, the NDX tends to perform strongly from this point onward. However, technical fragility and fundamental uncertainty mean it remains highly uncertain whether this potential support will translate into a meaningful rebound.

The SOX index is currently testing the critical near-term support level at 11,200. This level served as key support during the sharp sell-off on July 17, but the technical setup has visibly weakened since that bounce.

The 21-day moving average has crossed below the 50-day moving average, forming a short-term bearish signal.

More concerning is the fact thatif the 11,200 level is decisively breached, there is virtually no meaningful support until the 200-day moving average—which currently coincides with the longer-term uptrend line. This implies that a breakdown could trigger a significantly larger correction.

Despite technical pressures, some positive shifts are emerging at the market structure level.

According to Vanda data, institutional positioning has normalized, and retail investor participation has cooled significantly compared to earlier this summer. The previously overcrowded 'long semiconductors, short Mag 7' trade has largely been unwound, resulting in a clearer overall positioning structure.

Meanwhile, seasonal factors are turning favorable. Historical data show that the NDX tends to strengthen from this point onward, with July typically being a peak month for short squeezes. If seasonal inflows from retail capital begin to rebound in the coming weeks, the broader environment for tech stocks could gradually improve.

Technical fragility and fundamental uncertainty are reinforcing each other. Recent financing discussions and strategic investment moves by NVIDIA have reignited market concerns about the circularity of the AI buildout cycle—namely, that capital is being used to finance customers purchasing AI hardware, creating a self-reinforcing funding loop.

At the same time, hyperscalers’ relative performance versus the Nasdaq 100 Index has significantly lagged. According to Goldman Sachs, this underperformance has reached an extreme level rarely seen in history. Bloomberg and JPMorgan data also show that the short-term divergence between Mag 7 capital expenditures and the SOX Index has widened to an abnormal degree, further fueling doubts about the sustainability of AI hardware demand.

In regional markets, the strong rally in the KOSPI has raised caution among some market participants.

The key difference is that the current rally is underpinned by stronger earnings fundamentals—the recovery in the memory cycle is providing tangible profit support for South Korean tech companies.

However, if market sentiment runs too far ahead of fundamentals, historical experience suggests that risks should not be ignored.

Overall, the semiconductor sector currently faces a complex situation with conflicting signals: weakening technicals, doubts over the quality of AI-related demand, and accelerating competition from China coexist with position liquidation, seasonal support, and potential valuation-driven attractiveness following recent corrections.

On the tech volatility front, while the VXN/VIX ratio has retreated from recent highs, it remains in a range indicating elevated stress in technology stocks.

The critical variable in the current scenario is whether the SOX can hold the 11,200 support level. If this level breaks, the next meaningful support would be the 200-day moving average; if it holds and stabilizes, seasonal fund inflows combined with a lighter positioning structure post-liquidation could provide a window for a tech sector recovery.

This article does not constitute personal investment advice, nor does it represent the platform's views. The market involves risks; please exercise caution and make independent judgments and decisions.

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