With the S&P 500 trading near the 3,000 level and a record high, stocks have bounced back from a slight decline in May and many are in or close to overbought levels. The bounce back has also caused investor sentiment to jump sharply as well. There are few signs pointing to trouble for the market and that worries me.
I looked at the 10 main sectors and the Sector SPDR ETFs that represent them over the last few weeks. I put together the table below and shared it with my Seeking Alpha subscribers. What we see is that nine of the 10 sectors have weekly stochastic readings in overbought territory with the energy sector being the lone exception.
As for the 10-week RSI readings, only the tech and consumer staples are in overbought territory at this time. Most of these 10 ETFs have seen their RSIs rise since May and are trending toward overbought territory.
I went back to the beginning of the fourth quarter of 2018 when all the fun started last year and took note of where the indicators were at the time. Of these 10 ETFs, seven had overbought levels on the stochastic readings and four of them had overbought readings on the RSI.
Overbought levels on these indicators aren’t enough to concern me, at least not as standalone signs. We have seen all of them hit overbought readings and remain in overbought territory for extended periods. However, when you start combining these readings with other signals—now you have a reason to be concerned.
One indicator that I look at on a weekly basis is the Investors Intelligence Bull Bear ratio. The indicator dropped sharply in the fourth quarter and fell below the 1.0 level for the first time since 2015. Since the beginning of the year, the indicator has been rising sharply. It just jumped to 3.45 in the past week and that is the highest reading since early 2018. The difference is that in early 2018, the ratio was falling as the trade war was just getting started.
Source: Yardeni Research
Looking at yet another economic/investor sentiment indicator, the Consumer Confidence indicator fell sharply in June. The indicator peaked at 137.9 last October and then fell. The indicator dropped to 120.2 in January, but jumped back up in February and has been trending higher since then, that is until June.
I have shared this chart on Bull Market Rodeo before, but felt it should be shared again. We see that when the market peaked in 2000 and 2007, the consumer confidence readings were above 100 and then fell more than 10%. We have now seen two monthly readings that mark a level that is 10% below last October’s peak.
If the consumer confidence indicator continues to trend lower, it could be an indication that we are getting ready to enter our next bearish phase.
None of the factors above are enough to warrant panic selling, at least not as standalone indicators. However, when you combine the three factors, it is certainly worth moving with caution. The oscillators and their current status, the Investors Intelligence report, and the Consumer Confidence—the patterns in these collective indicators are starting to resemble times from the past when caution was warranted.
I know we are dealing with second quarter earnings season currently and we have another few months before the fourth quarter gets started, but thought I would share these recent observations.
Investors continue to find reasons to be optimistic—the Fed cutting rates, hopes of a trade deal with China, the deal to raise the debt ceiling, etc. Sure, all of these things are positive for the short-term outlook, but a trade deal isn’t going to magically cure the global economy from slowing. The Fed isn’t cutting rates because the outlook is so rosy. The debt ceiling being raised helps keep the government in business, but it also adds to our out of control deficit.