Strategist warns: This part of the market is "very fragile" and may face a deeper correction

Investing.com - Despite the resilience of the U.S. stock market in the face of macro shocks, BTIG strategist Jonathan Krinsky believes that some sectors are beginning to show increasing fragility.

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Krinsky noted that despite sharp rises in oil prices and weak labor market data, the S&P 500 index has performed better than expected.

“If someone had told us a week ago that WTI crude oil would rise from $67 to $92 per barrel, and non-farm payrolls would record a decline of 92,000, well below the market expectation of 55,000, we would have thought the S&P 500 would firmly break below 6,700 points. However, after two dips below 6,700, the index has performed relatively resiliently,” he wrote in his Sunday report.

However, Krinsky said confidence in whether the index can hold this level has waned. A decisive break below 6,700 could open the door to testing the 200-day moving average around 6,582, which implies about 3% downside potential.

The energy market has also become extreme, which could have broader implications for stocks. “WTI crude oil prices on Friday were up to 45% above their 200-day moving average,” Krinsky pointed out. This level has only appeared during a few periods in the past forty years, including during the Gulf War and the Russia-Ukraine conflict. Both instances proved to be short-lived rallies.

In the credit market, investment-grade bond spreads have widened to their weakest levels since last spring, and concerns in the private credit market are also intensifying. If these conditions continue to worsen, they could coincide with further declines in the S&P 500.

Within the stock market, bank stocks have successfully held the 200-day moving average, but Krinsky said that due to exposure in insurance and private credit businesses, the broader financial sector is “significantly weaker.”

Meanwhile, software stocks have shown relative strength, with the IGV (NYSE:IGV) software ETF rising over 7% last week and potentially moving toward the $95-$100 range.

In contrast, semiconductor stocks, after a strong rebound, seem to be losing momentum. Krinsky expects software stocks to outperform the sector in the coming months.

On the other hand, the most vulnerable area within the semiconductor sector may be storage chip manufacturers.

“We believe storage chip stocks look quite fragile here, having formed a small top, but there is still a long way down before reaching meaningful support levels,” Krinsky said, noting that stocks like SanDisk (NASDAQ:SNDK), Micron Technology (NASDAQ:MU), Western Digital (NASDAQ:WDC), and Seagate (NASDAQ:STX) currently appear “precarious.”