US Stocks Seem Extremely Overbought

By | 02/12/2024

The S&P 500 continues to reach new highs on a weekly basis.

But a major top could be forming right now.

One of the most reliable indicators to anticipate market tops and bottoms has been the bullish percent index.

The BPI is a breath indicator that uses a point & figure chart to determine when markets are overvalued or undervalued.

The green line in this chart below shows the BPI.

One way to read it is when the BPI line drops below 70, it is likely the stock market will sell off. And when the BPI moves up and crosses above 30 it’s a signal to buy the stock market. The blue line on the chart is the S&P 500 stock market index.

As you can see the BPI is pretty accurate in timing the market, at least over the last few years.

But as the far right of the chart demonstrates the BPI green line has recently dropped below 70. Yet the stock market continues to move higher.

This uncommon divergence may be explained by the fact that just a handful of stocks in the S&P 500 make up nearly 30% of the index by weight. So even if most stocks are not making new highs the largest 7 stocks can still pull the overall market up.

The relative strength index (RSI) for the S&P 500 shows overbought both in the daily and weekly time frames.

The CNN Fear & Greed index currently shows the market is at Extreme Greed conditions.

And the S&P 500 10-year P/E ratio is currently at 32x, which is 60% above the historical average of 20x.

Overbought conditions and deteriorating market breadth strongly suggest a top is brewing for the S&P 500.

However this doesn’t mean we’ll see a large correction right away. Price action gets the final say and right now the momentum is still favouring the upside.

This is not the time to sell and hold cash. But it could be useful to pay attention, especially if you have some short term investments or swing trades.

Goldman Sachs says insuring your stock portfolio against a market crash hasn’t been this affordable in years. Buying some put spreads may be a good idea to hedge a long portfolio in case of a pullback over the next month or so. 🙂



Random Useless Fact:

Author: Liquid Independence

Editor in Chief at Freedom 35 Blog.

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02/20/2024 11:28 am

Just a thought, with inflation devaluing everyone’s purchasing power, could a factor for business being a higher value just be a reflection that there is more value in the business vs. dollars because our dollars ae devaluated? So you simply need more of them to buy stocks in the business giving an illusion of being overbought and why there is a new high in markets?