S&P 500 chart watchers fret about a possible pullback in coming months

Traders work on the floor of the New York Stock Exchange during morning trading in New York City. Photo by Michael M. Santiago/Getty Images files

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With technology stocks powering major U.S. indexes toward record highs, technical analysts see the makings of a selloff in the coming months unless more sectors join the rally.

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The S&P 500 index’s furious rebound from its tariff-fueled April slide has left it less than one per cent 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 four per cent below its own record touched in November.

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Chart watchers from firms including Janney Montgomery Scott LLC say U.S. stocks can start losing steam over the next couple months without a bigger boost from other major market groups such as 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.

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“The markets are very overbought on a short-term basis and leadership is concentrated heavily toward S&P 500 and Nasdaq 100,” 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.”

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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.

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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.

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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 U.S. election and sparked a wide risk-on rally in stocks.

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But some technicians are seeing encouraging signs.

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Mark Newton, head of technical strategy at Fundstrat Global Advisors LLC, 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.

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Adam Turnquist, chief technical strategist at LPL Financial Holdings Inc., 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 per cent and 8.6 per cent. The index last reached a record on Feb. 19.

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The data still isn’t enough for Turnquist to rule out a late-summer pullback.