We have stated several times in recent days that the broad stock market is overbought. However, we have not shown WHY we believe this to be true. Our apologies. Here is a chart that supports our case:
The S&P 500 Index has only been more overbought…based on its weekly RSI chart…one other time since the credit crisis. That was in early 2018. (Again, that was in EARLY 2018…just before a 10% correction…not just before the deeper correction later in 2018. The market is actually more overbought today than it was just before that second (deeper) 2018 correction…that took place during the 4th quarter of that year.)
Yes, it HAS been JUST AS overbought as it is now on three other occasions…in 2010, 2011 & 2013, but it has only become more overbought one other time (in early 2018). Those other 3 occasions when the S&P became similarly overbought were followed by declines of 7%, 17% and 19%.
Of course, it could become even more overbought…just like it did that one time in early 2018. In fact, the S&P was able to rally another 10% back then…AFTER the weekly RSI reached the level it stands today. So there is certainly no guarantee that the market will not rally further over the coming weeks. We’re merely pointing out that the broad market’s technical condition is getting quite stretched. Therefore, we’re going to have to see the kind of rally that we’ve only seen one other time in the last decade in order for the market to rally in a significant way from current levels.
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Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The ...