(Bloomberg) - With technology stocks powering major US indexes toward record highs, technical analysts see the makings of a selloff in the coming months unless more sectors join the rally.
The S&P 500 (^GSPC) Index’s furious rebound from its tariff-fueled April slide has left it less than 1% from an all-time high. But so far, a key measure of market breadth — the percentage of the S&P 500 members trading above their 200-day moving average — hasn’t budged since May. The equal-weighted version of the S&P 500, which is often seen as a better reflection of market participation, is more than 4% below its own record touched in November.
Chart watchers from firms including Janney Montgomery Scott say US stocks can start losing steam over the next couple months without a bigger boost from other major market groups, like financials, transports and small-cap companies. Until then, sheer momentum can keep the S&P 500 going, barring any major and unexpected shocks regarding trade or geopolitics.
“The markets are very overbought on a short-term basis and leadership is concentrated heavily toward S&P 500 and Nasdaq 100 (NQ=F),” said Dan Wantrobski, technical strategist and associate director of research at Janney Montgomery Scott. “If breadth does not follow the breakouts in S&P and Nasdaq, then we will be on the watch for a correction.”
Wantrobski and other analysts point to August as a potential area of weakness based on their analysis of chart patterns, momentum projections and seasonal trends. The technicians’ warnings line up with looming deadlines for tariff negotiations, especially with China, as the delays put in place for the higher levies on Chinese imports will run out that month.
Others on Wall Street highlight the S&P 500’s frothy valuation metrics, especially with President Donald Trump’s July 9 deadline to reach deals with some of the country’s major trading partners fast approaching, and earnings season starting shortly after.
Breaking Out
Among the 11 S&P sectors, information technology, industrials and communication services are the only three that have touched all-time highs. Meanwhile, the small-cap Russell 2000 Index still has a long way to go to reach the high of late November, just after Trump won the US election and sparked a wide risk-on rally in stocks.
But some technicians are seeing encouraging signs.
Mark Newton, head of technical strategy at Fundstrat, says this week’s show of strength in industrials, transports, consumer discretionary and financials — even though some of these groups are yet to make fresh records — is a compelling reason to stick with equities.
Adam Turnquist, chief technical strategist at LPL Financial, pointed to historical data as further cause for optimism. According to LPL’s analysis, since 1954, when the S&P 500 makes a meaningful new high at least 60 trading days from a previous high, average and median returns 12 months later stood at 9.7% and 8.6%. The index last reached a record on Feb. 19.
The data still isn’t enough for Turnquist to rule out a late-summer pullback.
“We wouldn’t be surprised to some consolidation if we rally to a new high,” he said, noting the market’s implied volatility tends to pick up starting in July and peak in late September to early October. “This is a market where we prefer buying dips versus chasing it higher.”
Momentum Signal
Some chartists also say the relative strength index, which is a momentum indicator that shows whether an asset’s prices have veered too quickly in one direction, is projected to move into a bearish zone later this summer. That typically indicates a reversal may be around the corner. At the moment that index shows that the S&P 500 is hovering close to overbought territory on a 14-day basis.
John Kolovos, chief technical strategist at Macro Risk Advisors sees first support for the S&P 500 at around the 5,930 level, which would mark a 2.7% drop from the last close.
“I do not think we get a meaningful setback until later this summer, at which point weekly momentum indicators will be firmly into overbought territory and market seasonality cycles will turn into headwinds,” he said.
By Esha Dey
