S&P 500 at 5,000 – Is It Overbought?

Stock prices reached yet another new record highs, but is there any gas left?

Stocks broke out of a short-term consolidation on Wednesday, and yesterday, the S&P 500 reached the new record high of 5,000.40. However, it gained just 0.06% and the daily trading range has been a mere 13 points.

Recently, my short-term outlook was still neutral because the market seemed overbought and ready for a downward correction. When in doubt, it’s better to stay out of a position than to try to catch a top and open a short position too early.

Although a downward correction is widely expected, the overall market sentiment remains bullish, and the index may have another opportunity to reach new records above the psychologically significant 5,000 level. This morning, futures contracts indicate that stocks are likely to open 0.3% higher following a revision of the Consumer Price Inflation number from +0.3% to +0.2%.

Investor sentiment remains very elevated; Wednesday’s AAII Investor Sentiment Survey showed that 49.0% of individual investors are bullish, while only 22.6% of them are bearish. The AAII sentiment is a contrary indicator in the sense that highly bullish readings may suggest excessive complacency and a lack of fear in the market. Conversely, bearish readings are favorable for market upturns.

Last Tuesday, I wrote that “Despite new highs, it seems that a correction scenario is likely in the near term. (…) caution may be advised, as a correction or consolidation could occur at some point.” The prediction proved correct until Thursday when the market began rallying again. However, the same statement remains very true this morning, as the market still appears overbought in the short term.

On Thursday, I mentioned that “We may have to deal with a correction or consolidation of several weeks of advances. With the season of quarterly earnings announcements coming to an end and a series of important economic data, profit taking may follow.”

The S&P 500 is likely to fluctuate along the level of 5,000 following the recent record-breaking rally. On Wednesday, it broke above a short-term consolidation, as we can see on the daily chart.

S&P 500 at 5,000 – Is It Overbought? - Image 1

Nasdaq Hits New Record Too

The technology-focused Nasdaq 100 index reached a new all-time high at 17,814.12, slightly extending its Wednesday’s advance. Recently, it has been relatively weaker than the broader stock market, but recently, it caught up with the S&P 500. However, Nasdaq’s rally was led by a handful of “FANG” stocks like META, NVDA and MSFT. On Wednesday, I wrote about the NYSE FANG+ index.

S&P 500 at 5,000 – Is It Overbought? - Image 2

VIX Extended Its Decline

The VIX index, also known as the fear gauge, is derived from option prices. On Wednesday, it fell below the 13 level, indicating a lack of fear in the market as stock prices reached record highs, and yesterday, it continued to trade below that level.

Historically, a dropping VIX indicates less fear in the market, and rising VIX accompanies stock market downturns. However, the lower the VIX, the higher the probability of the market’s downward reversal.

S&P 500 at 5,000 – Is It Overbought? - Image 3


Futures ContractExtends Advance

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it continues to trade above the 5,000 level. The support level remains at 5,000-5,020.

S&P 500 at 5,000 – Is It Overbought? - Image 5


Yesterday, the S&P 500 index reached new record high, slightly surpassing the 5,000 level, and today, it’s likely to extend the advance. However, in the short term, the possibility of a downward correction cannot be overlooked. A quick glance at the chart reveals that the S&P 500 index has recently become more volatile.

On December 21, I mentioned that “in a short-term the market may see some more uncertainty and volatility”, and indeed, there was a lot of uncertainty following the early-December rally and the breakout of the S&P 500 above the 4,700 level. However, the previous week’s price action left no illusions of a potential medium-term trend reversal. On Tuesday, I noted that “The market is overbought in the short term, but predicting a correction is currently very challenging.”. This still holds true; last Wednesday’s rout was very short-lived, as bulls came back with a vengeance on Thursday and Friday. This Wednesday, the market rallied even further.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to extend the advance above the key 5,000 mark.
  • The market appears overbought in the short term, but no negative signals are evident.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist