The S&P 500 broke above a key level. Now what?

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The S&P 500 index closed Friday at its highest level in almost a year. But that doesn’t mean stocks are ready for a bull run just yet.

The broad index on May 26 closed above the 4,200 level for the first time since August 2022, when the market began to sell off and fell sharply to last year’s low of around 3,577 in October.

The S&P 500 ended last week up 1.8% at around 4,282, marking its best weekly gain since late March.

So, what finally pushed the general index to break through its resistance level? The gains were fueled by three key updates that investors applauded:

It has been much easier for the bulls to gain the upper hand with the recent AI tailwinds and the debt ceiling which has provided momentum. Meanwhile, the bears are tired of taking on the relentless bulls and failing to gain traction, Jos Torres, senior economist at Interactive Brokers, wrote on Friday.

For months, investors have debated what will drive the S&P 500 to break through, either up or down, from the roughly 3,800-4,200 trading range it was stuck in at the start. course of the last six months. Now that the index has managed to clear the highest resistance level, it begs the question: does this rally have legs?

Not necessarily. There are several reasons to believe that stocks could fall back below 4,200 in the near term, says Adam Turnquist, chief technical strategist for LPL Financial.

One concern is that much of the index’s 11.5% advance this year has been driven by monster gains in mega-cap tech stocks, while small- and mid-cap stocks have lagged. An equally weighted version of the S&P 500 rose only about 1.5% for the year.

That means tech stocks that have fueled stock market gains this year are overbought and investors are likely to take profits as they climb, according to Turnquist.

There is definitely potential for a pullback or consolidation as we get closer to that 4,300 level, he said.

After the potential debt ceiling disaster is averted this week, the Treasury Department will start selling bonds like crazy. It could also create some competition for stocks, potentially driving down stock prices.

The good news is that the S&P 500 will likely return to trading in the 3,800-4,200 range, which means any downside, at least in the short term, will likely be limited, according to Turnquist.

But another risk is the potential for hawkish comments from the Federal Reserve at its press conference after the June 14 meeting, he said, adding that this would certainly trigger a pullback, potentially a slight hike in interest rates and that would certainly weigh on the technology space.

The Bitcoin rally is running out of steam.

Last month, the world’s largest cryptocurrency by market capitalization fell nearly 7% to $27,216 a coin. This is its worst monthly performance since November 2022, when the collapse of crypto exchange fund FTX rocked digital currencies.

Bitcoin’s poor performance in May came after surging 23% in March, when the collapses of regional banks Silicon Valley Bank and Signature Bank caused investors to look for places to hide their money. The cryptocurrency surpassed $30,000 in April.

So what drove the price of bitcoin down?

The strong performance of the US dollar, which tends to have an inverse relationship with bitcoin, is one of the culprits. The US dollar index has risen steadily over the past few months and is back to levels it had before the March banking turmoil.

Another reason is that the recovery from the banking crisis has run out of steam, says Trading.biz analyst Saqib Iqbal.

The decline in bitcoin price and its struggle to break above key resistance levels raise concerns about the sustainability of its uptrend, Iqbal said.

Still, he expects bitcoin to rally modestly but remain around a resistance level of $30,000 later this year when investors have more clarity on the trajectory of interest rate hikes. of the Federal Reserve.

Moreover, any decline in bitcoin this year is likely to remain around the same level, according to Iqbal.

Monday: Factory orders for April. Apple’s annual developer event.

Tuesday: JM Smucker Compan Earnings

(SJM)y.

Wednesday: Consumer credit for the month of April.

THURSDAY: Weekly jobless claims and mortgage rates.

Friday: American Baker Hughes oil rig number.