Market Overview

Last month, several market indicators were sending cautionary signals. Since then, market conditions have improved considerably. Major indexes have continued to advance, market breadth has improved, and investors have increasingly shifted back toward economically sensitive and growth-oriented sectors.

While the market is extended in the short term and could experience periodic pullbacks, the overall evidence remains constructive. In fact, several areas that were previously acting as headwinds have recently turned into tailwinds, suggesting that the bull market may be broadening beyond its previous leadership groups.

The charts that follow illustrate why I remain bullish and highlight some of the areas that may help drive the next phase of the market advance.

S&P 500: Breakout Remains Intact

The first chart shows the S&P 500 and highlights the significant change in market character over the past two months.

In previous newsletters, I discussed the importance of the reversal day at the end of March and the follow-through day that occurred shortly thereafter. These are two of the signals I look for when evaluating whether a market correction is ending and a new uptrend may be beginning. In this case, those signals proved meaningful, as the market advanced strongly following both events.

The chart also highlights the area of resistance that capped the market during the lengthy consolidation that occurred from late 2025 into early 2026. In mid-April, the index broke above that resistance level and has continued to advance. I have marked this breakout with a green arrow on the chart. A move above a major consolidation often signals that demand has overcome supply and that higher prices are likely.

Another encouraging sign is that the index has remained above its key moving averages throughout the advance. While there was a brief pullback that briefly carried the index slightly below its 10-day moving average, buyers quickly stepped back in, and the market resumed its upward trend. Since then, the index has continued to make higher highs while maintaining its position above the 21-day exponential moving average and the longer-term 50 and 200-day moving averages.

Taken together, these signals suggest that the market remains in a healthy uptrend. While short-term pullbacks can occur at any time, the evidence from this chart continues to support a bullish outlook.

Summation Index: An Early Improvement in Breadth

The second chart is the same market breadth chart that I highlighted in last month's newsletter. Market breadth measures how broadly stocks are participating in a market advance and can often provide valuable clues about the underlying health of the market.

Last month, the chart was sending a cautionary message. The Summation Index was trending lower and approaching the zero line. Historically, periods where the index is below the zero line and declining below its short term moving average have often coincided with weak market conditions. Those periods are highlighted in red on the chart.

Since then, conditions have improved. The Summation Index held near the zero line, turned higher, and recently crossed back above its short term moving average. While this is still an early development, it is a constructive sign, particularly when viewed alongside the market's advance to new all time highs.

One area of concern remains. I have noted a negative divergence on the chart where the major indexes have moved to new highs, while the Summation Index has not yet exceeded its prior peak. This lower high suggests that breadth has improved, but not to the same degree as the index itself.

For now, I view this chart as modestly bullish. The recent turn higher is encouraging and suggests that breadth may be improving. Going forward, I will be watching to see whether the Summation Index can continue advancing and eventually move above its prior high. If it does, it would provide additional confirmation that the market advance is broadening and becoming healthier.

Risk-On Leadership Returns

The third chart revisits one of the most important themes from last month's newsletter. At that time, I highlighted the fact that several economically sensitive sectors were underperforming the defensive Consumer Staples sector. Historically, that type of behavior has often appeared before meaningful market corrections, which is why I viewed it as a warning sign.

The chart includes two previous market corrections and highlights how many of these same sectors began underperforming Staples before the market peaked. Those periods are marked with red and green vertical lines on the chart. Last month, I also highlighted a red box showing that four of the five sectors being monitored were underperforming Staples, while only Technology remained relatively strong.

Over the past month, that picture has changed significantly.

The green box on the chart highlights how each of these sectors has begun to regain relative strength. Technology, Consumer Discretionary, Communication Services, Financials, and Industrials have all started outperforming Staples once again. This shift began as the market bounced from its short-term moving averages and has continued alongside the advance to new highs.

I have labeled this area "Risk-On Reestablished" because the message from the chart is very different today than it was a month ago. Instead of investors favoring defensive sectors, money is once again flowing into areas that are typically associated with economic growth and risk-taking.

This is an important development because healthy bull markets are usually supported by broad participation from economically sensitive sectors. While no single chart should be viewed in isolation, the improvement in these relative strength relationships provides another piece of evidence supporting the bullish case.

Software: A Potential New Area of Leadership

The final chart shows the Software Index, IGV, which has been one of the weakest major growth-oriented sectors over the past year. While many areas tied to AI infrastructure advanced strongly, software stocks struggled and experienced a significant decline.

The chart highlights a downtrend line that defined this weakness for much of the past year. Each rally attempt failed below that line, keeping the sector in a clear downtrend.

That changed during the second half of May.

IGV advanced strongly above its downtrend line, signaling that the long period of weakness may be coming to an end. Breakouts from well-defined downtrends are important because they often mark a shift in investor behavior. What was previously an area of weakness can begin attracting new capital and become a source of market leadership.

I view this development as bullish for two reasons. First, it provides additional evidence that investors are becoming more willing to take risk. Second, it suggests that market leadership may be expanding beyond the areas that have driven much of the advance over the past year.

It is still early, and the breakout will need to hold. However, software is now a sector worth monitoring closely. If the recent strength continues, it could become an attractive area for new investment opportunities and provide another source of support for the broader bull market.

Client Account Update

Client accounts currently have lower equity exposure than they did a month ago. This reduction was not driven by a change in my market outlook. Rather, it was the result of several positions reaching their predetermined sell levels and being removed from portfolios as part of my risk management process.

While I remain bullish on the overall market, I continue to manage each position individually. Over the past month, several newer positions failed to gain traction and were sold, along with one longer term holding that broke below an important support level. As a result, cash levels have increased.

At this point, I view the current cash position as available buying power rather than a defensive allocation. If market conditions remain constructive and attractive opportunities emerge, I intend to redeploy that capital selectively into stocks that are demonstrating strong relative strength and favorable risk-reward characteristics.

The overall message from the market remains positive. My focus now is on identifying the strongest opportunities while continuing to manage risk at the individual stock level.