Assessing the Risks of a Potential Reversal in the US Equity Rally: Are Bulls Losing Momentum?

The US equity market has enjoyed a robust rally in 2025, with the S&P 500 closing the year with a 16.4% gain and the Nasdaq 100 maintaining a strong upward trajectory according to technical analysis. However, as the calendar flips to 2026, investors are increasingly scrutinizing technical and sentiment-based signals for early warnings of a potential reversal. While the broader market remains in bullish territory, mixed technical indicators and cautious investor sentiment suggest that the rally may be encountering structural headwinds.

Technical Indicators: Mixed Signals Amid a Bullish Bias

The S&P 500's technical profile reveals a tug-of-war between short-term caution and long-term optimism. The 14-day RSI stands at 44.947, signaling a sell bias, while the 5-day moving average (6844.35) and 200-day moving average (6825.97) suggest buy signals. This divergence highlights the market's struggle to sustain momentum. The 50-day moving average (6896.41), however, tilts toward a sell signal, creating a conflicting mosaic of indicators.

For the Nasdaq 100, the technical picture is equally nuanced. The index is forming a symmetrical triangle pattern, requiring a breakout above 635 to confirm bullish momentum. Such patterns often precede sharp price movements, but their resolution remains uncertain until a clear breakout occurs. Meanwhile, the CBOE Volatility Index (VIX) shows an RSI of 57.052, avoiding overbought territory (RSI >70) but still reflecting a neutral-to-bullish bias. The VIX's mixed moving averages-9 buy signals versus 3 sell signals-underscore its role as a barometer of market anxiety.

Investor Sentiment: Caution Over Exuberance

Retail investor sentiment, as measured by the AAII survey, reveals a cautious stance. Only 42% of investors hold a bullish outlook for equities over the next six months, while 31% are bearish. This "bull-bear spread" of 11 percentage points is relatively narrow compared to historical extremes, where spreads below -41.2% (significantly bearish) or above +40% (overbought) have historically preceded market reversals. While current sentiment does not yet signal a crisis, it reflects a lack of conviction among retail participants-a contrarian indicator in itself according to market analysis.

The put/call ratio further amplifies this caution. The S&P 500's put/call ratio of 1.16 indicates heightened demand for downside protection, a bearish signal. In contrast, the broader equity put/call ratio (0.56) suggests relatively low bearish sentiment. This discrepancy highlights a key risk: while institutional investors may remain optimistic, retail and speculative activity is increasingly hedging against a potential correction. Historically, ratios below 0.39 (extremely bullish) or above 1.0 (extremely bearish) have correlated with market inflection points. The S&P 500's current ratio, while not yet at extremes, is trending toward a threshold that could trigger defensive positioning.

Synthesis: A Market at a Crossroads

The interplay between technical and sentiment indicators paints a complex picture. On one hand, the S&P 500's advance/decline lines and its position above the 200-day moving average suggest a continuation of the bullish trend. On the other, the narrowing bull-bear spread and elevated put/call ratios signal a growing awareness of risks. This duality mirrors the 2000 dot-com bubble, where technical strength coexisted with rising caution until a critical breakout failed according to market analysis.

For the Nasdaq, the symmetrical triangle pattern adds another layer of uncertainty. A breakout above 23,959 could validate the rally, but a breakdown would likely trigger a retest of key support levels. Given the index's reliance on growth stocks-many of which are still trading at elevated valuations-a reversal could amplify volatility.

Conclusion: Caution as a Strategic Imperative

While the US equity market remains in a technically bullish phase, the convergence of mixed technical signals and cautious sentiment suggests that investors should adopt a measured approach. The S&P 500's 16.4% gain in 2025 has created a fertile environment for profit-taking, and the absence of overbought conditions (RSI <70) provides a buffer for further gains. However, the growing divergence between institutional optimism and retail caution, coupled with the VIX's elevated readings, warrants vigilance.

Investors should monitor the S&P 500's ability to hold above its 200-day moving average and the Nasdaq's breakout potential. Additionally, shifts in the put/call ratio and AAII sentiment readings could serve as early warnings of a reversal. In a market where technical strength and psychological caution coexist, strategic hedging and disciplined position sizing may prove critical in navigating the uncertain months ahead.