By Jared Blikre

Stocks are back at records. The rally still has something to prove.

The S&P 500 (^GSPC) broke out after months of reversals that frustrated bulls and bears alike. Wednesday's modest decline left it just below Tuesday's record close.

The Nasdaq-100 (^NDX) and chip stocks came back even faster, with the PHLX Semiconductor Index (^SOX) still up about 15% from its July 29 close after leading Wednesday's pullback.

Wednesday's retreat begins the more revealing phase. The broad indexes now have to defend their breakout zones, while chips still face heavy resistance overhead.

Jim Bianco called the move a "MEGA short cover," after bearish reports and podcasts had piled up around AI and technology. He noted that the Nasdaq-100's four-day run through Tuesday ranked among the strongest of the past two decades.

The biggest rebounds also came from the stocks hit hardest before the July 29 low. The worst-performing fifth of the S&P 500 heading into the recent low has rebounded a median 8%, while the group that held up best during the recent downturn is down about 1%.

Among chips, the prior laggards have risen about three times as much as the stocks that held up best.

The reversal came at an intriguing time.

Citadel bought the public stock portfolio of Leopold Aschenbrenner's Situational Awareness fund on July 30, one day after the Fed meeting and the recent market low. The sale removed a prominent overhang after the leveraged AI portfolio had suffered huge losses.

Still, a rally can begin with short covering and keep going.

"The technical reset we have been waiting for has largely occurred," Citadel's Scott Rubner wrote. "July did not change the structural bull market. It reset it."

Forced buyers can create speed. A lasting rally needs investors to keep buying after the squeeze fades.

The chip index needs to hold 10,500 to the downside and clear 12,500, then 13,000 to the upside. Yahoo Finance AlphaSpace

The group spans servers, networking, power equipment, connectors, enterprise systems, and cybersecurity. Arista closed at a record Wednesday, while the rest remain within roughly 5% of their prior highs.

The biggest semiconductor gains carry more repair risk.

Sandisk (SNDK) has rallied more than 30%, while Marvell (MRVL) is up nearly 30%. Lam Research (LRCX), Applied Materials (AMAT), Micron (MU), SK Hynix (SKHY), Intel (INTC), and Western Digital (WDC) have all posted double-digit rebounds.

Yet many remain 20% to 40% below their prior highs.

Jurrien Timmer, director of global macro at Fidelity, noted that "the fast money in South Korea and the US is doubling down." Micron and SK Hynix have added about $350 billion combined as the memory trade rebounds from a bear market.

Wednesday offered the first small look at which stocks investors may be willing to defend. The next deeper pullback should provide a much better one.

An S&P 500 retreat toward 7,600 would be ordinary after a fast breakout. A close below the 50-day moving average near 7,490 would revive the risk of a fakeout.

An S&P 500 retreat toward 7,600 would be ordinary after a fast breakout. A close below the 50-day moving average near 7,490 would revive the risk of a fakeout.

The Nasdaq-100 should hold the 29,000-to-30,000 area before challenging its record close near 30,660 and intraday high near 30,760.

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For chips, 12,500 is where shorts may reload and the rally could reverse. A move above 13,000 would force more of them out and give the damaged semiconductor names room to keep running.

The indexes will show whether the rally survives. The stocks holding near their highs will show where the next leadership is forming.

Jared Blikre is the global markets and data editor for Yahoo Finance. Follow him on X at @SPYJared or email him at jaredblikre@yahooinc.com.

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