Stock market in a correction

Summary

• The stock market turned into a correction.
• The uptrend is still intact.
• The crypto market is stabilizing following a steep drop.

Quick recap: last week

A week ago, the Kvarn Pulse newsletter was written in a somewhat cautious mood. The crypto market had turned into a downtrend, which we considered a somewhat bad omen for the stock market.

Stock Market in a Correction

Two weeks ago, we began to highlight a potential "moment of truth" lying ahead for the stock market in our Kvarn Pulse newsletter. The crypto market had started to show signs of weakness, which we viewed as a warning for the stock market as well.

This week, we can conclude that the "moment of truth" we warned about two weeks ago did indeed arrive in the stock market last Friday.

The S&P 500 index fell by more than 2.5 percent on Friday, June 5, 2026. Since then, the decline has continued, resulting in a drop of about five percent from its peak.

We also haven't seen any signs yet that would suggest the correction is over. The VIX index has remained above 20, indicating continued market unease and making us prepare for the possibility that the correction will continue.

Kvarn X Early Warning Indicator has also turned yellow, giving reason to prepare for a potentially deepening correction.

How Deep of a Correction?

Now that the stock market's fierce spring rally has turned into a downtrend, investors naturally have questions about what to prepare for.

We are analyzing the situation through a "traffic light" model.

For any downward movements happening above 7,350 points, we treated them merely as noise and were not ready to draw any conclusions questioning the continuation of the uptrend.

Now that this level has been breached, we must open the door to the possibility of a deeper correction.

We are currently in what we have defined as the yellow zone. As long as we stay in this zone, our primary expectation remains that this is just a natural correction within an ongoing uptrend. However, we must also now prepare more seriously for this primary expectation to fail.

Right in the middle of our yellow zone runs the S&P 500 index 50-day moving average. As long as we stay above this key moving average, our baseline expectation remains clearly optimistic. Dropping below the 50-day moving average, on the other hand, would begin to shift expectations more towards the uptrend breaking.

Ending up in our designated red zone (below roughly 7,050 points) would turn the outlook unequivocally pessimistic. Especially after falling below the record high of around 7,000 points seen in January, it would be difficult to hold onto any optimistic interpretations.

Alongside the S&P 500 index, it may be useful to monitor the performance of "risk-on" sectors against more defensive sectors within the stock market.

Let's look at plotting the technology sector (XLK) against the rest of the S&P 500 index (SPXT). From the chart below, we can see how this ratio rose almost vertically in the latter half of May. This shows how strongly the stock market's rally relied on the technology sector.

The correction that has occurred so far is nowhere near breaking this trend. Our primary expectation is that if the equity bull market were truly ending, it would quite quickly manifest as a break in the technology sector's relative strength.

We are keeping a close eye on the ratio presented above, but so far, analyzing it leads us to view the past week's drop as just a healthy correction.

In summary of the above observations, we can conclude that, for now, we do not yet see convincing evidence of the uptrend that began in April breaking. However, the possibility of it breaking should be taken seriously for the time being, as we have also not seen clear signs of the correction ending.

Crypto Market Stabilizes After the Drop

Two weeks ago, we started ringing alarm bells regarding the stock market because we saw weakness in the cryptocurrency market.

Now that these alarms concerning the stock market have begun to prove justified over the past week, the crypto market itself has, somewhat ironically, shown at least momentary stabilization. The price of the largest cryptocurrency, Bitcoin, has stopped making new lows and has stayed above $60,000.

We find it somewhat noteworthy that even a clear dip in the stock market has not been able to keep Bitcoin's price below $60,000. Attempting to "pick bottom" just above $60,000 doesn't necessarily seem like the worst idea. On the other hand, for an investor who wants to see momentum return before taking positions, there is no need to get excited until Bitcoin's price climbs at least above $70,000.

The idiosyncratic rally of the crypto market's bright spot, Hyperliquid's HYPE token, also seems to have broken over the past week. The price appears to have drawn both a "lower high" and a "lower low" in recent days.

If one wants to gauge the general direction of the crypto market from selected altcoins in addition to Bitcoin, HYPE might serve as one of the best directional indicators. Hyperliquid has been perhaps the hottest project in the crypto market in early 2026, and if the general direction of the crypto market were to return to an upward trajectory, it could be seen first in HYPE's price returning to an uptrend.

Thematic Ideas

With the general direction of the stock market having clearly turned downwards over the past week, this week's best thematic idea might be ensuring one’s portfolio's risk management and considering at least a partial realization of potential unrealized gains.

If one still wants to look for opportunities in the stock market in this situation, the financial sector might be among the best options.

If we plot the financial sector ETF (XLF) against the S&P 500 index, we can see that this sector, which has long underperformed the index, has clearly started to develop stronger than the index in June.

For many investors, the most practical way to invest in the financial sector specifically may be through ETFs offering relatively broad exposure, rather than picking individual stocks. For example, the price of the iShares S&P U.S. Banks ETF (IUS2), which invests in banks, is currently in a quite promising uptrend and has just surpassed its local peak from early May.

We are currently living in interesting times in the financial markets. Behind us is a historically fierce rally that has now turned into a correction. The correction itself is unlikely to surprise many, but next, attention turns to its depth. Is this just a small "reset" before a journey to 8,000 points on the S&P 500, or has the AI cycle already seen its peak?

We have exceptionally interesting times ahead with SpaceX IPO and the new Federal Reserve Chair, Kevin Warsh, hosting his first Fed meetings. Wherever the market goes, we will continue to monitor the situation and keep you up to date, so stay tuned!