Stock Rally Takes a Breather?

Quick Recap: The Previous Week

The main story of last week’s Kvarn Pulse newsletter was:

The stock market still looked good, but the crypto market’s uptrend had started to look broken.

We highlighted two observations in last week’s analysis:

Our first observation was that Bitcoin’s failed rallies have often been followed by a steep drop, and we found it interesting to see if that would happen this time as well.

Our second observation was that a break in the crypto market's rally has often been a somewhat bad omen for the stock market too.

A week later, we can examine how the situation looks in light of these two observations.

Bitcoin's Price in Decline

For Bitcoin, history seems to have repeated itself.

A sharp rally that occurred in a bear market and stalled below a downward-sloping 200-day moving average was indeed once again followed by a steep drop downwards.

The next point of interest is whether Bitcoin’s price will stay above $60,000 and, simultaneously, above the local bottom of February's sudden drop. So far, it has narrowly managed to stay above this level, but it is still too early to declare the drop over.

The price of the second-largest cryptocurrency by market cap, Ether, strongly appears to be already on its way below its February bottom.

The same goes for Solana's SOL token.

The uptrend of the crypto market's bright spot, the decentralized crypto exchange Hyperliquid's HYPE token, seems to have stalled in recent days.

For HYPE, we are closely monitoring the $55 area. As long as the price stays above this level, the recent dip looks like nothing more than a buyable dip in an ongoing uptrend.

The drop in recent days has been fierce, and it would seem likely that the immediate downside is now limited. Bitcoin hovering around $60,000 and HYPE in an interesting-looking dip could indeed offer risk-tolerant traders appealing opportunities for at least a short-term bounce.

What Does This Mean for Stocks?

A week ago, we pointed out in our Pulse newsletter that a break in the crypto market's rally has not typically been particularly good news for the stock market either.

From 2025–2026, several examples can be found where Bitcoin’s price turning downwards has quickly been followed by at least a break in the stock market's rally or an outright reversal into a downtrend.

However, we also noted that at the time of writing, we had not yet seen any real weakness in the stock market. On the contrary, the situation looked quite bright. The S&P 500 index was still in an uptrend, and market breadth was improving promisingly.

Over the past week, we may have started to see the first cracks in the stock market.

The S&P 500 index's rally began to stall on Tuesday, June 2, 2026, and on Wednesday, June 3, 2026, it saw a decline of about 0.7%.

On Thursday, June 4, 2026, the S&P 500 index recovered some of this drop, but the Nasdaq 100 index continued its downtrend.

Last week, we saw no reason for concern in the stock market partly because, in addition to the S&P 500 index rising, the "breadth" of the stock market rally was improving, and the proportion of stocks trading above their 50-day moving average was growing.

From the chart below, it can be seen that this development peaked on Thursday, May 28, 2026. Since then, the proportion of stocks in an uptrend has turned into a clear decline and is approaching the local bottom seen on May 19, 2026.

Thus, it appears that the crypto market's downward turn once again preceded at least a temporarily weaker period in the stock market.

What to Prepare For?

How serious of a weakness should we prepare for in the stock market after such a strong rally?

Currently, our primary expectation is that this is merely a consolidation phase and/or capital rotation between stock market sectors, and at most a minor correction.

So far, the decline shown by the stock market looks only like controlled "profit-taking," and we have not yet seen signs that would give reason to expect a more significant correction.

From the chart below, we can see that the VIX index, which often provides an indication of market nervousness, crept slightly upwards early in the week but dropped back below 16 on Thursday. As long as the VIX index stays below its 200-hour moving average, we see no reason to expect more significant corrections.

Kvarn X Early Warning Indicator has also remained in the green. As long as this state of affairs persists, we consider the risk of immediate corrections to be low.

For now, it seems more likely that this is just a surface ripple in an ongoing uptrend. However, we will continue to monitor the situation with heightened scrutiny, keeping in mind that major weaknesses always start with small initial symptoms.

Thematic Ideas

Finally, let's review some of the thematic ideas we presented in previous weeks.

First, we feel it is necessary to bring up the defense industry thematic idea we presented last week.

This theme looked interesting last week, with the price of the VanEck Defense UCITS ETF appearing ready for a new leg up.

Over the past week, however, we have seen this rally stall at a rapid pace.
We are therefore discarding this thematic idea for the time being.

A thematic idea that we have not had to discard, on the other hand, is healthcare. The price of the iShares S&P 500 Health Care Sector ETF has continued its uptrend.

If we plot the healthcare sector ETF against the S&P 500 index (XLV/SPY), we can see that the healthcare sector, which lagged badly behind the stock market rally in April, has started to show improving relative strength during May. It will be interesting to see if the healthcare sector demonstrates outright outperformance next.

The price development of the iShares MSCI Europe Consumer Discretionary Sector ETF, which we also highlighted last week, continues to look promising.

As a new thematic idea for this week, we highlight gene technology.

The price of the ARK Genomic Revolution UCITS ETF (AAKG) has risen to new all-time highs in recent days.

We find it noteworthy that this fund is performing so strongly at a time when the general tone of the stock market has, at least momentarily, turned a bit more cautious. In our opinion, this kind of relative strength is worth keeping in mind, as the theme might perform even better when it gets the tailwind of a returning general market rally.

We are currently seeing a quite interesting situation in the financial markets. The crypto market has taken a plunge, and the next point of interest will be whether this turns out to be solely crypto-specific weakness, or whether we are once again seeing an early warning of what lies ahead for the stock market as well. For now, we remain open to both possibilities and are following the situation with interest.

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