S&P 500 Rally on Thin Ice: Overbought Signals and Weak Breadth Ahead of Tariff Deadline

The S&P 500 continues to notch new all-time highs, luring investors with the shine of breakout momentum. But beneath the surface, there are growing signs that this rally may be skating on thin ice. A combination of overbought technical signals, weak market breadth, and looming macroeconomic headwinds, such as trade tariffs, suggests caution may be warranted.

Let’s break it down.

Weak Market Breadth: Only a Few Stocks Are Carrying the Index

While the index has surged past previous resistance zones, the percentage of S&P 500 stocks making new 52-week highs has plummeted—from 24% in November 2024 to just 5% currently. This stark divergence reflects a narrow rally, heavily skewed by megacap tech and AI-linked names.

Historically, sustainable rallies are supported by broad market participation. When leadership narrows, it often signals market fragility, where the gains are not evenly distributed and can unravel quickly if sentiment shifts.

RSI Screams Overbought

The Relative Strength Index (RSI) is another indicator to watch. Currently sitting above 72, the RSI is in classic overbought territory. While an overbought RSI alone doesn’t imply an immediate reversal, in context with weak breadth and resistance overhead, it often precedes a pause, consolidation, or even a pullback.

It’s worth noting that the S&P 500 has rallied steeply from its April lows, and the speed of this rise has left limited room for support-building. This heightens the risk of volatility in the event of a negative catalyst.

Resistance from Previous Highs

The index is currently testing a critical resistance zone marked by previous highs around the 6,200–6,230 region. This level has historically served as a supply zone, and the current test—without strong participation from the broader market—could result in a failed breakout.

The price also remains confined within a rising channel, and a break below this structure could confirm bearish pressure or at least a near-term top.

Macro Watch: Tariff Deadline Approaches

If the technicals weren’t enough to warrant caution, there's a macro trigger on the horizon—the July 9 tariff deadline.

As trade tensions simmer, the potential for new or increased tariffs could rattle global markets. Any escalation would significantly impact sentiment, especially given the fragile foundation of the current rally. With narrow leadership and stretched valuations, the index is particularly vulnerable to external shocks.

Investor Takeaway: Time to Tighten the Belt

While bulls may point to breakout highs as a sign of strength, seasoned traders know that what lies beneath the surface is more important.

Here's what you can do:

• Tighten stop-losses if you’re holding long positions.
• Avoid chasing the index—wait for pullbacks or confirmation from breadth indicators.
• Look for reversal signals near key resistance levels.
• Rotate into sectors showing relative strength and better participation.

Until breadth improves and volatility settles, the path ahead looks less like a runway and more like a tightrope.

Final Thought

The S&P 500’s record run may not be built to last—unless the rest of the market joins the party. With overbought conditions, lack of participation, and an uncertain macro environment, it’s a textbook setup for caution.

Stay vigilant, stay diversified, and remember: when the generals lead without the troops, the battle is rarely won.