Technical Signals Suggest the S&P 500 Could Face a Deeper Pullback

A key technical indicator is flashing warning signs for the U.S. stock market, with historical data suggesting the S&P 500 could be vulnerable to a notable correction in the coming weeks, according to analysis from BTIG.

The warning comes as momentum indicators, weakening market breadth and rising bond yields begin raising concerns about the sustainability of the recent rally.

Overbought RSI Signal Has Previously Led to S&P 500 Declines

The SPDR S&P 500 ETF (SPY) recently recorded a Relative Strength Index (RSI) reading of 78, a level typically associated with overbought conditions.

RSI is a momentum indicator measured on a scale from 0 to 100, with readings above 70 generally signaling that an asset may be overextended.

Following the elevated RSI reading, the SPY ETF fell 1.2% the next trading session.

According to BTIG strategist Jonathan Krinsky, similar setups have occurred only six times since 2023 when SPY dropped more than 1% after RSI exceeded 75.

In five of those six cases, the S&P 500 experienced declines of at least 7% from peak to trough in the weeks that followed.

The only exception saw the market move sideways before resuming its upward trend.

Historical returns after these signals were negative across timeframes ranging from five to forty days.

Weakening Market Breadth Adds to Warning Signs

BTIG noted that the RSI signal appears alongside broader deterioration in market internals that has been developing for several weeks.

Market breadth weakened significantly, with approximately 70% of New York Stock Exchange volume concentrated in declining stocks — the highest reading since March.

This suggests selling pressure is becoming more widespread beneath the surface, even while major indexes remain near highs.

Semiconductor and AI Stocks Show Early Signs of Weakness

Friday’s trading session also brought notable weakness in semiconductor and artificial intelligence-related stocks.

The VanEck Semiconductor ETF (SMH) recorded its worst daily performance since March, falling 3.8%.

Krinsky suggested semiconductor and AI stocks may increasingly begin aligning with broader market weakness rather than continuing to outperform.

This shift could become significant given how heavily recent market gains have depended on technology and AI-related companies.

Record Divergence Between Index Performance and Individual Stocks

BTIG highlighted an unusual divergence inside the S&P 500.

While the index traded roughly 8.5% above its 50-day moving average, only 47% of individual S&P 500 companies remained above their own 50-day averages.

According to Krinsky, this represents the widest divergence ever recorded.

The imbalance suggests gains are becoming increasingly concentrated in a smaller number of large-cap stocks rather than supported by the broader market.

Rising Bond Yields Could Become a Bigger Risk for Stocks

Another growing concern is the continued increase in long-term Treasury yields.

The 30-year U.S. Treasury yield has climbed back above 5% and is approaching previous cycle highs near 5.17%.

Although major indexes have largely absorbed higher rates so far, average stocks have shown greater weakness.

Higher borrowing costs historically create pressure on equity valuations, particularly in growth sectors.

BTIG warned that sustained increases in long-term yields may eventually weigh even on technology and AI companies that have remained relatively resilient.

Technology Sector Concentration Reaches Record Levels

The concentration of technology stocks within the S&P 500 has also reached new extremes.

The technology sector now represents approximately 37.5% of the index — exceeding levels recorded during the dot-com bubble.

Such concentration may increase vulnerability if investor sentiment toward large technology companies weakens.

History Suggests Caution, Not Necessarily a Bear Market

While historical patterns indicate elevated risk of a pullback following similar signals, analysts are not necessarily forecasting a prolonged bear market.

Instead, current indicators point toward the possibility of increased volatility and a correction after an extended period of strong gains.

Investors may continue monitoring RSI levels, market breadth, bond yields and AI-related stocks for clues about the next direction of the broader market.