Navigating the Overbought Stock Market: Is It Time for Investors to Take a Break?

The stock market has been on a rollercoaster ride lately, with significant gains observed on various trading days. On one such Friday, the major indexes closed near their session highs, leading to a sense of optimism among investors. Many of these indexes are now in a near-term bullish trend, with only a couple remaining in a neutral or bearish trend. Market breadth, which measures the overall strength of the market, remains positive. However, there are signs that a period of consolidation may be on the horizon. The percentage of stocks trading above their 500-day moving averages is close to turning red, indicating a potential downturn. This metric is crucial as it often precedes market corrections, making it a critical indicator for investors to watch.

On that optimistic Friday, all major indexes closed higher with positive internals and higher trading volume. Some indexes, such as the DJIA and Dow Jones Transports, closed above their resistance levels, shifting the trend to bullish from neutral. However, the NASDAQ Composite and NASDAQ 100 remain in neutral trends, while the rest are bullish. Market breadth also remains positive on exchanges such as NYSE and NASDAQ. All stochastic levels are overbought but have not yet generated bearish crossover signals. Despite the positive market trend, some cautionary signals in the data suggest that investors should tread carefully. The overbought nature of the market could lead to a period of consolidation or even a downturn.

All 1-day McClellan overbought/oversold oscillators are back to overbought levels, suggesting a potential pause or consolidation. The percentage of S&P 500 stocks trading above their 50-day moving average, a contrarian indicator, rose to 79%. This is just below the 80% level that has historically preceded market corrections. The detrended Rydex ratio, another contrarian indicator, dropped to neutral from bearish. The AAI bears/bull ratio, yet another contrarian indicator, declined to neutral. However, the investor intelligence bear/bull ratio remains bearish, with more investment advisors bullish than bearish. The open insider buy/sell ratio is now neutral, after being on the sell side for most of last week. These mixed signals indicate that while the market is currently bullish, there may be better buying opportunities in the near future.

As noted in ‘you should be worried that the market is too complacent,’ the markets have become so excitable that even a passing tweet can send stocks swinging up or down. The hot-money crowd may be happy with this, but it serves as evidence of an unstable market environment that could be a setup for a contra-trend collapse. Tech remains firmly in the lead but is exceptionally overbought after the recent advance. XLF, the financial sector, is the best-performing sector of the year and remains in a healthy uptrend. As noted previously, XLU and XLV broke out of consolidation and are running higher. Both are holding up better in the current correction than the rest of the market. XLK rose sharply last week but is also extremely overbought. It is holding its rising trend line but has registered a weekly bullish dollar correction.

XLI, the industrials sector, which is a good ‘tell’ for broader economic strength, is back to previous resistance. Profits should be protected, but the bullish trend remains in place. XLB, the materials sector, is extremely overbought and close to reversing, but the overall uptrend remains intact and bullish. XLE, energy, pulled back to support after breaking out to a tremendous run. XLY, discretionary, is back to extremely overbought and due for a mild correction before advancing further. XLY completely broke out of the consolidation on a weekly basis and performed better than XLK, despite weakness heading into the election. With the dollar breaking out and potential risk ahead, taking profits and raising stops was advised. We suggested selling a portion of XLY and XLC, looking for potential short-term hedging opportunities and actively reallocating cash from overweight sectors.

International sectors such as emerging markets are outperforming once again. Currently overbought but holding up better than the S&P 500, they remain stuck below resistance. VYM has been performing well but is overbought, and exposure should be reduced and profits taken. We took profits in holdings on Thursday and are now closely managing our position. Large-cap stocks that have held up well in volatility are currently at all-time highs. As noted previously, we also added a small position in growth over core to capture the rally while still maintaining a slight overweight to our small and mid-cap holdings. Driven by rampant fear, the next economic bust need not be an epic end-of-the-world event like the 1929 stock market crash, the bank runs of the 1930s, or even the 2008 financial meltdown.

Anyone with reasonably open eyes can see aggressive signs that the U.S. economy is actually robust. The volatile US stock market is now beginning to reflect and behave like it belongs in a very advanced state of bubble, which its true bearish nature is now upon all of us. ‘Fear-full’ investors are self-suggesting that there could be a crash any time now, which should be considered as good as promoting fear because such behavior seems to run the price of things up. When prices markedly go up, the cost of living will likely go up to an unsustainable level, doing inflationary damage left uncontrolled by international authorities. The downward whipsaw move from apparently all-time highs is just the latest can’t-miss opportunity to buy-the-dip.

With memories of previous crashed markets being reversed more fleeting below the Ms of below-average trading volumes, bullish traders are operating in comparatively unchecked insidiously inflating markets as bullish as ever before. Although this boastful security analyst is not able to enter any text related to this particular book, the selected Steinbeck can be viewed here since we like to make great book content available to give to members. When fears of the Black Monday stock crash, the infamous devil in the next opening down break of 1987, being repeated from the spookily bearish training seen for statistical analysis depicted in charts showing eight unusual drops, you will know that the accelerating rate of heartbeat thumping of lies will speed the second ahead as the house of slim overballation from the shenanigans of Mr. Market up and down again has no real support in the revenue expected from the underlying businesses being unprofitably carried by banks deepification of government which is therefore perpetual through default.

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The stock market is still considered overbought, and short-term traders remain bullish. However, there is some concern starting to surface. It is unclear if there will be continued strength after Chair Powell speaks on Friday. The overboughtness of the market is decreasing, and if the market declines next week, it could potentially become oversold again. The AAII has reported a bullish reading of 51.6%, which has been over 50% on four other occasions in the past year. Three out of four times, the S&P experienced a 5% or more dip, and the fourth time, the Russell took a significant hit. If the market drops next week, the AAII could quickly change back to bearish sentiment.

If we experience more downside and sentiment turns bearish, the chatter about September’s seasonality will likely increase. The market has become too bullish in the past week, and a shift in sentiment is needed. The statistic to watch is the lack of new highs expanding. Despite good breadth, individual stocks are not showing much progress. Interest rates, specifically in TLT, are expected to stop at around 100. If TLT moves back to 94, there may be reasons to avoid buying it. The put/call ratio has already returned to .90, indicating a need for some fear in the market. Adobe stock does not show significant movement and is facing resistance at 580. Newmont stock is overbought in the short term, but long-term it is expected to reach around 58.

The author discusses selling in the stock market, particularly in small-cap stocks. The author’s indicators are based on breadth and suggest an overbought market. The winning streak has been broken, and the author predicts a pullback in the market. The 30-day moving average of the advance/decline line is also overbought. The volume indicator is also showing an overbought market. The number of stocks making new highs has not increased significantly. The rally has been led by index movers rather than individual stock performance. The author pays attention to sentiment and observes a recent increase in call buying. The put/call ratio has been decreasing in the past few days. A low put/call ratio is considered bearish.

Even the equity portion of the put/call ratio is low. Monday’s total put/call ratio was .72, and Tuesday’s total put/call ratio was .82, still on the low side. The ten-day moving average of the put/call ratio has decreased significantly. Many have placed hope on Chair Powell’s speech on Friday. The US dollar has decreased in value since July and is close to reaching December lows. The author believes the lows from last year should hold. The author notes an increase in chatter about the weak dollar. The daily sentiment indicator for the dollar is at 17. If the dollar continues to fall, the sentiment indicator may reach the ‘too much’ side. In conclusion, while the stock market shows bullish trends, various indicators suggest caution. Investors should consider these signals and possibly take a break from buying, waiting for more favorable conditions.