S&P 500 Rally 'Susceptible To Stalling,' Expert Says: Is SPY Heading For Break Or Pullback?

The S&P 500 has been on a tear lately, gaining 25.68% over the past year. The SPDR S&P 500 ETF Trust SPY, which tracks the index, came in just behind with a rise of 25.62%.

But while investors enjoy the bullish ride, the question looms: is the rally here to stay, or is a stall on the horizon?

SPY Chart Points To Strength, But Narrow Leadership Raises Concerns

SPY has been climbing higher, benefiting from several bullish technical indicators.

Chart created using Benzinga Pro

SPY ETF is currently trading above its five-day, 20-day, and 50-day exponential moving averages, signaling strong buying pressure. These trends, along with a price above the eight-day and 20-day simple moving averages, make SPY an attractive technical buy.

The Moving Average Convergence Divergence (MACD) indicator of 1.94 further supports a bullish outlook, and SPY's relative strength index (RSI) sits at 63.73, indicating that there is still room for the ETF to run.

However, despite the strong technicals, Adam Turnquist, Chief Technical Strategist for LPL Financial, warns that the rally may be "susceptible to stalling." He notes that "market breadth measures have not kept up with the recent rebound," meaning fewer stocks are driving the gains.

This narrow leadership could signal that if the leading stocks begin to falter, the broader market could quickly lose momentum.

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What's Fueling The Rally? What Could Derail It?

So, what's fueling the S&P 500's rise in the first place? Factors such as President Donald Trump's pro-growth agenda, an optimistic economic outlook, and solid corporate earnings have all contributed, Turnquist notes. On top of that, a cooler-than-expected Consumer Price Index (CPI) report and a drop in Treasury yields have added fuel to the fire.

However, despite these positives, Turnquist emphasizes that market rallies don't follow a straight path. The S&P 500's impressive gains have brought it closer to record-high levels, but that doesn't mean it's immune to a correction. "Bull markets are not linear," he says, underscoring that while the rally appears strong, it could still be vulnerable to a downturn.

Market history shows that a correction, defined as a 10% pullback, occurs about once a year on average. While the likelihood of an imminent correction isn't high, investors should always be prepared for the possibility of a downturn, especially when narrow market leadership raises flags.

What Does This Mean For SPY Investors?

SPY's strong technical position offers optimism, but narrow market leadership raises caution. While not imminent, a correction remains possible as gains rely on a few stocks.

Turnquist advises investors to stay vigilant, balancing the ETF's momentum with potential risks ahead.

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