The S&P 500’s recent series of all-time highs is remarkable, but after such a strong run, investors are rightly wondering if a correction is imminent. While technical indicators suggest the market is ripe for a pullback, several bullish factors continue to support the current upward trend.
Technical Analysis: A Mixed Picture
The S&P 500 is undoubtedly overbought, with several technical indicators suggesting it needs a breather. A pullback to 4,983 would be a healthy development, potentially setting the stage for further gains. However, stronger support at 4,800 remains in place, offering a potential cushion against any steeper declines.
Expert View: Steve Grasso, Director of Institutional Sales at Stuart Frankel “It’s important to remember that ‘overbought’ doesn’t automatically trigger a selloff. Markets can remain overbought for extended periods, especially during strong bull runs.”
Key indicators like the modified Bollinger Bands and equity-only put-call ratios signal overbought conditions but haven’t yet generated confirmed sell signals. This suggests the market may have room to rise further before a significant correction takes hold.
Breadth and Volatility: Bullish Signs Remain
Breadth oscillators, which measure market participation, have been just strong enough to avoid sell signals. The continued dominance of new highs over new lows on the NYSE is a clear bullish sign, reflecting broad-based investor optimism.
The Cboe Volatility Index (VIX), often referred to as the “fear index,” has settled back to benign levels after a brief spike. The current “spike peak” buy signal remains in effect, and VIX’s downward trend further reinforces the bullish narrative for stocks.
Expert View: Liz Ann Sonders, Chief Investment Strategist at Charles Schwab “Declining volatility is historically positive for equities. As long as the VIX remains subdued, it suggests investor complacency and a continued appetite for risk assets.”
Derivatives Market: A Vote of Confidence
The volatility derivatives market paints a bullish picture. The upward-sloping term structures and premiums on VIX futures indicate that investors are willing to pay for protection against future volatility, suggesting they expect the market to continue its upward trajectory.
The Bottom Line
While overbought conditions warrant caution, the positive weight of bullish indicators suggests that the current rally may have further to run. Investors should maintain their long-term positions but remain vigilant for any shifts in the technical landscape that could signal a reversal.
Expert View: Peter Boockvar, Chief Investment Officer at Bleakley Advisory Group “It’s a balancing act. Don’t fight the upward momentum, but be prepared to adjust your exposure if sentiment deteriorates and sell signals emerge.”
Important Considerations
Market Dynamics: Unexpected geopolitical events, shifts in monetary policy, or economic surprises can rapidly alter market sentiment. Stay informed about potential catalysts that could spark a downturn.
Risk Management: Reassess your risk tolerance and portfolio allocation regularly. Consider hedging strategies or gradually reducing exposure if you become increasingly concerned about a correction.
