For months, stock market pessimists have been saying US equities are overvalued.
And as of this past week, they have a major piece of tangible evidence.
The measure in question is the so-called relative strength indicator, which indicates when the stock market has gotten too stretched in either direction. An RSI measure exceeding 70 means the market is overbought and a downturn may be imminent. A drop below 30 indicates an oversold condition.
The RSI for the benchmark S&P 500 climbed above 70 last week and stayed in that overvalued territory for five straight days. The index’s repeated climb to record highs is now in danger – at least if the past 12 months is any indication.
- Business Insider/Andy Kiersz, data from Bloomberg
The indicator also climbed above 70 late last year, peaking on December 13. The S&P 500 was almost unchanged over the next month, slamming the brakes on the momentum that had seen the benchmark surge in 2016.
More recently, in early March, the RSI on the index once again found itself peaking above 70. The S&P 500 would drop 1.4% over the next month, despite a 5.6% year-to-date climb through the end of February.
But this is not to say the 8-1/2-year bull market as we know it is in danger. Rather than a full-fledged sell-off, the past two instances of overstretched conditions in the past year have resulted in more of a consolidation period.
What it does do is provide investors with a reality check – that contrary to recent returns the stock market doesn’t always climb in unstoppable fashion. Adding to positions, especially at these expensive levels, may not be worth the trouble for those looking to put more money to work – at least for the time being.