A Record-Breaking S&P 500 Could Lead to an Even Bigger Pullback. Here’s why

When U.S. investors return from the extended weekend, they will encounter a stock market that appears primed to surge to new all-time highs. However, any such breakout could be followed by a “deeper pullback” as seasonal headwinds begin to take effect.

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Jonathan Krinsky, BTIG’s chief technical strategist, highlighted this possibility in a Sunday note, emphasizing that the S&P 500 is approaching a key turning point. After months of trading within a narrow range, the index is nearing a resolution that could either confirm its bullish momentum or set the stage for a market retreat.

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The S&P 500 closed just 0.07% below its previous record finish of 5,827.04, which was reached on January 10. Throughout recent months, the index has oscillated within an increasingly tight range. Market concerns over persistent inflation and trade policy uncertainties have led to periodic sell-offs, but these declines have been counterbalanced by a strong corporate earnings season that exceeded expectations.

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As a result, the S&P 500’s price chart now reflects a pattern resembling a flat-topped flag, a technical formation that often signals an impending breakout above the upper boundary of the range.

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“The S&P 500 has spent much of the last three months consolidating within a relatively tight trading range,” Krinsky noted. “While new highs are not inherently bearish, and while the index appears poised to break out, we are entering a seasonally weak period with declining momentum.”

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Krinsky expressed concerns that even if the index reaches a marginal new high, it could quickly reverse course and undergo a more pronounced decline heading into March. However, as long as bears fail to drive the S&P 500 below the key 6,000 level, bullish investors will likely maintain control of the market.

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One reason the market may be more vulnerable than it seems is the weakening participation among individual stocks. While the S&P 500 is hovering near record levels, fewer than 60% of its constituent stocks are trading above their 50-day moving averages. This suggests that a significant portion of the index’s components are not experiencing sustained upward momentum.

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Additionally, efforts to broaden the market rally—particularly through small-cap stocks—have once again faltered. Despite hopes that smaller companies would participate in and potentially lead the next leg higher, they have struggled to gain traction.

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This underperformance is evident in the relationship between the iShares Russell 2000 ETF and the S&P 500, with the small-cap benchmark recently falling to its lowest relative level since July.

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Despite these broader concerns, Krinsky sees opportunities in certain sectors. Specifically, he remains optimistic about materials stocks, noting that they have recently broken out of a multi-week consolidation phase. Among the stocks he favors in this space are Corteva, International Paper, Steel Dynamics, and Vulcan Materials.

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He also pointed to the casino and gambling sector, where stocks appear poised for an upside breakout after trading sideways. Companies that have caught his attention include DraftKings, Accel Entertainment, Boyd Gaming, PENN Entertainment, and Las Vegas Sands.

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While the overall market faces near-term uncertainty, select pockets of strength may provide investors with opportunities amid a potentially volatile environment.

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