Markets are overbought, but there’s not much worry on Wall Street — yet

Trader Talk

Traders work on the floor at the New York Stock Exchange, November 4, 2019.

Brendan McDermid | Reuters

It’s not very exciting, but the market keeps advancing almost every day. The S&P has been up 10 of the 13 trading days this month, yet market technicians do not seem concerned the market is getting too far ahead of itself.

“This market is grinding higher — yes, it’s overbought, but markets that get overbought can stay overbought for an extended period,” Craig Johnson, technical market strategist for Piper Jaffray, said. “This is the exact opposite of what we saw last year. The Fed is now easing or neutral, and they are expanding their balance sheet. Trade war concerns are subsiding. We are not breaking down. We are breaking out.”

An additional factor is moving the market: fear of missing out. “Of the last 20 trading sessions, 15 experienced a positive closing tick, indicative of money inflows,” JC O’Hara, chief market technician at MKM Partners, wrote in a note today.

Dan Wantrobski, technical strategist at Janney Montgomery Scott, wrote in a recent note: “[W]e realize that ‘FOMO’ (fear of missing out) can trigger a pain trade higher still as we head into year-end.”

Leading the charge in November is technology, with big gains in the largest stocks.

The top 10 tech stocks, in particular, have had outsized gains that are dragging the S&P to new highs. With the S&P 500 up 2.6% in November, seven of the largest 10 technology stocks are outperforming the index, and only one — Cisco — is down on the month.

Big tech, so far this month:

Microsoft, up 4.9%

Apple, up 7.4%

Intel, up 3.1%

Adobe, up 6.9%

Accenture, up 6.8%

Broadcom, up 6.2%

Salesforce, up 4.0%

Mastercard, up 1.5%

Visa, up 1.0%

Cisco, down 4.9%

You would think that with big-cap tech stocks moving this fast there would be more trepidation among market technicians. While everyone agrees the market is overbought, few seem worried for now.

Wantrobski does expect some profit taking soon, particularly if the big-cap indexes keep pushing into new highs.

“The danger here is that eventually, these overbought large-cap indices (S&P 500 DJIA; etc.) will have to be reconciled against lagging small-cap benchmarks (like the Russell 2000 and Smallcap 600) — which have thus far failed to make new recovery highs. This non-confirmation out of the small/midcap area is creating a ‘negative divergence’ of sorts. In the past, such divergences have been resolved via corrections — although the timing of such is difficult to pin down at this time.”

When will it end? What could go wrong? “They’ve been telling us the ink is almost dry [on trade], if that’s wrong that is a problem,” Johnson said. “If GDP is weaker than expected, that’s a problem. Brexit talks falling apart” could also be a problem.

For now, it seems like the world is not so worried about these issues, and because of the lack of worry, this could go on for a while, Johnson wrote in a note today.

“From our perspective, we view signs of overbought conditions as validation of the breakout and not necessarily indicative of an end to the rally for now. … As we have previously noted, overbought conditions can persist for meaningful periods of time before either a time or price correction unfolds.”

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