The Record U.S. Stock Market is Not Yet Overbought, But It's Getting Close

With the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all reaching record highs, cautious investors may be wondering how much further these indices can climb. According to a widely observed momentum gauge, the rally doesn't appear to be over-extended yet, though it may be approaching that point.

‍

The 14-day relative strength index (RSI) is often used as a contrarian indicator. When an asset's 14-day RSI exceeds 70, it's considered to be in overbought territory, suggesting that the rally might soon exhaust itself and lead to a pullback. Conversely, an RSI below 30 indicates an oversold condition, potentially enticing more buyers.

‍

The key factor is the speed of the RSI's rise or fall, which triggers a contrarian signal. Currently, the Dow's RSI stands at 69.65, the Nasdaq Composite's at 67.37, and the S&P 500's at 69.31, according to MarketWatch data. These values are close to the overbought threshold but haven't crossed it yet.

‍

It's important to note that in mid-December, the S&P 500's RSI hit 82, prompting only a mild pullback before the bull run resumed. Similarly, the Nasdaq Composite's RSI above 80 in December caused only a brief pause in its upward trajectory.

‍

Mark Newton, head of technical strategy at Fundstrat, believes there is still room for growth. "Overall, short-term trends remain bullish, and momentum and breadth are supportive of further gains into June technically," he said. Newton suggests that while deciding whether to hold out for possible consolidation is difficult, any weakness will likely be temporary and still lead to gains into mid-June.

‍

One market where traders might need to be more cautious about a near-term retreat is London’s FTSE 100. This index has risen 7.2% in the past month, driven by low valuations attracting predators and a boost from rising industrial commodity prices benefiting its heavyweight resources sector. The FTSE 100's RSI is at 80.2, a level that has historically preceded periods where sellers gain the upper hand.

‍

In summary, while the major U.S. indices are nearing overbought levels, they haven't yet crossed into dangerous territory. Past performance suggests that even if a pullback occurs, it may be brief. Technical strategist Mark Newton remains optimistic about continued gains through June. However, the FTSE 100's high RSI indicates that it might be due for a pullback, especially given its recent rapid ascent. Investors should keep a close watch on these indicators to navigate potential market shifts.

‍