3 Reasons S&P 500 Bulls Should 'Stay the Course'

The S&P 500 and Nasdaq Composite have reached fresh all-time highs, displaying market resilience despite geopolitical risks and cautious institutional positioning. A Bank of America survey reveals institutional investors are significantly underweight U.S. equities, favoring international stocks, eurozone, and emerging markets. This underweight positioning is interpreted as a bullish contrarian signal for U.S. equities, indicating potential for fresh capital allocation. However, the S&P 500 is technically overbought (RSI 75), a condition that preceded a 10% correction in mid-2024, while upcoming events like a tariff deadline and FOMC meeting introduce potential volatility, despite recent unwinding of short-term pessimism.

Analysis

Major U.S. indices, including the S&P 500 (SPX) and Nasdaq Composite, have broken out to new all-time highs, demonstrating significant resilience amid geopolitical and domestic political uncertainty. A key contrarian bullish signal emerges from a Bank of America survey indicating that institutional asset managers are historically underweight U.S. equities, instead favoring international stocks and emerging markets. This positioning, combined with an overweight allocation to cash, suggests there is significant sidelined capital that could fuel further upside as managers may be forced to chase the rally. The recent breakout was technically supported by a bullish "outside day" candle on June 23, with the SPX finding support at its 30-day moving average. Immediate support is seen at the previous all-time closing high of 6,144. However, significant risks are present. The market is technically overbought, with the SPX's 14-day Relative Strength Index (RSI) at 75, a level that preceded a 10% correction in mid-2024. While short-term sentiment has improved, with the 10-day put/call ratio rolling over from a peak, the unwind of pessimism began from a relatively low level, suggesting the subsequent rally may lack the sustained power of previous advances. Upcoming event risk, including a July 9 tariff deadline and an FOMC meeting, coupled with the potential for a "buy the rumor, sell the news" reaction to a new spending bill, introduces further catalysts for potential volatility.

Key Decisions for Investors

• The combination of strong price momentum and underweight institutional positioning supports maintaining a bullish stance on U.S. equities, as managers may need to allocate fresh capital to avoid underperformance.
• Given the S&P 500's overbought condition (14-day RSI at 75), which previously preceded a 10% correction, it is prudent to consider implementing protective hedges, especially with the VIX near its 2025 low.
• Monitor key technical levels closely: a break below support at the 6,144 former high or the rising 30-day moving average could signal a reversal, while overhead resistance near 6,469 and 6,758 may trigger profit-taking.
• Stay alert to near-term event risks, particularly the July 9 tariff deadline and the end-of-month FOMC meeting, as they could serve as catalysts for increased market volatility and a potential shift in sentiment.