Stock Rally Approaches the Moment of Truth

Quick Recap:  Previous Week

Last week, the Kvarn Pulse newsletter was written in a rather calm mood. The stock market rally had temporarily stalled into sideways movement. However, we did not see signs of an immediate correction risk.

Rally continues

Over the past week, the stock market rally has continued, and the S&P 500 index has once again climbed above 7,500 points.

Over the past week, we have seen both new signals supporting the continuation of the rally and some signs that warrant a bit of caution.

The most positive signal of the past week has been the "broadening" of the stock market rally.

In early May, we noted that the percentage of stocks trading above their 50-day moving average was decreasing, which caused some concern. A "narrowing" of a rally is often one signal that an uptrend may be nearing its end.

In the latter half of May, however, we have seen market breadth improve again. This builds confidence in the continuation of the uptrend.

We have also been paying attention to the weakening of Consumer Discretionary (RSPD) relative to Consumer Staples (RSPS). A downturn in this ratio has often foreshadowed a weaker period for equity indices.

Over the past week, we have also seen this ratio turn upwards.

Based on these observations, the stock market rally thus looks "healthier" than it did 1–2 weeks ago.

At the same time, the VIX index, which often indicates market nervousness, has remained low and gives no reason to expect an immediate correction.

Kvarn X Early Warning Indicator has also stayed in the green, thus similarly giving no reason to expect an immediate correction.

If the uptrend is continuing, market breadth is improving, and there are no signs of market jitters, is it all just sunshine with not a single cloud on the horizon?

Almost.

At the moment, we see one clear question mark in sight.

While the stock market continues its upward trajectory, the crypto market's uptrend appears to have unequivocally broken.

The price of the largest cryptocurrency, Bitcoin, has been struggling below $74,000. As a result, it is hard to see it in an uptrend by any measure anymore.

On the daily chart, Bitcoin's price development looks like a classic "bear market rally" that stalled right at the 200-day moving average.

In failed rallies, Bitcoin's price has often seen rather large sudden drops. It remains to be seen whether such a drop is coming this time, or if the price will stay above the local bottom of around $60,000 seen in February.

Among the major altcoins, a few of the weakest are already near their February bottoms.

On the stronger end of tokens, HYPE seems to have encountered currently insurmountable resistance around $64. Attention now turns to the $54 level, as dropping below it would confirm that the uptrend is broken.

The crypto market thus appears ready to throw in the towel for now.

What Should We Make of All This?

Typically, the end of a Bitcoin rally has often preceded some sort of weaker period in the stock market.

The end of Bitcoin's rally has not necessarily meant that equity indices immediately turn into a direct decline. However, it is usually followed by a slowdown in the rally, a shift to sideways movement, or an outright decline in equity indices.

Of course, it doesn't have to play out that way this time.

It is entirely possible to build a justified argument that this spring's rally differs from previous bull markets due to its extreme speed and concentration on the AI theme and semiconductors. The drivers pushing the stock market higher have not given Bitcoin the kind of lift seen in previous bull markets, leaving it dozens of percent below its record highs.

If the upward drivers for the stock and crypto markets have been different, perhaps the crypto market's downturn wouldn't have to mean anything for the stock market this time. We are completely open to this possibility.

At this stage, we view the stalling of the crypto rally as a warning sign, prompting us to monitor the stock market's uptrend more critically. With the crypto market showing clear weakness, there would be no reason to be surprised if we were to see similar weakness in the stock market next.

At the same time, it must be stated that no weakness has been seen in the stock market yet. As noted earlier, there are even signs of the rally strengthening.

Thematic ideas

In previous Kvarn Pulse newsletters, we have highlighted technology-focused investment themes such as semiconductors, space technology, and cybersecurity. These themes have generally developed excellently.

To balance the spectrum of thematic ideas and, on the other hand, to address the question marks raised by the crypto market's weakness, we are offering a few slightly less tech-centric ideas this week. Hopefully, investors already have enough technology themes in their portfolios by now, and after their fierce rally, we consider this a good moment to look at some ideas to balance them out.

As our first thematic idea, we highlight healthcare. The price of the iShares S&P 500 Health Care Sector UCITS ETF (QDVG) has just risen above its April peak and looks ready to continue its journey upwards.

As our second thematic idea, we highlight the defense industry. The price of the VanEck Defense UCITS ETF (DFEN) has just reached its previous local peak. Breaking above this level would be a very promising sign.

From the chart above, it can also be seen that the defense industry was a very hot trend in 2025, but since January 2026, it has performed significantly weaker. It will be interesting to see if a new upward move is now ahead.

Those looking for a higher-tech alternative could turn their gaze to the Invesco Defence Innovation ETF (IVDF). The price of this fund is currently soaring at new record highs.

However, it is worth noting that if your portfolio already includes the space sector and/or cybersecurity, this ETF may contain some overlap with them. If, on the other hand, these strong themes are not yet in your portfolio, this ETF could offer exposure to them while combining the seemingly returning momentum of the defense industry.

As our third thematic idea, we highlight the MSCI Europe Consumer Discretionary Sector ETF, which invests in European consumer products. The price of this fund is also just rising above its previous local peak.

The fund invests in European consumer products, some of which are in higher price categories. These companies are often quite pro-cyclical in their price development, meaning this fund cannot be considered an actual defensive investment. It can, however, be a good option for an investor looking for return opportunities outside the technology sector.

The financial markets are currently experiencing a rather interesting time. Equity indices are pushing higher without any signs of a correction. At the same time, the weakness in the crypto market raises a major question mark over whether the risk appetite of the most speculative investors is already waning.

The coming weeks will be extremely interesting as we monitor whether Bitcoin's price acts as a "leading indicator" for the stock market this time around as well, or whether the AI-driven stock rally continues to distance itself from cryptocurrencies.

Wherever the market goes, we will continue to monitor the situation and keep you up to date, so stay tuned!