Is the Stock Market Overbought

Peter Northwood • June 22, 2023

There has been some great upside momentum in the financial markets recently. We've seen the S&P 500 index at its highest level for a year and the Nasdaq 100 index has also been booming. Plus we've broken out of those ranges we seemed to be stuck in.


So is that it? Have the markets absorbed the Powell updates and the bulls have won or is the market overbought and the bears will yet have their day?



Overbought

When the price of an asset is trading at a higher price than its real worth, the market is defined as overbought. This happens when the price reaches extreme values and eventually it will begin to fall. This refers to a market state where the price has gone up too far and is likely to soon perform a move in the opposite direction.


If you look at a lot of the current technical indicators, they say that the market is running hot at the moment. But there are two sides to every story and a number of analysts also have the opposite view.



The case for the Bulls

US inflation is starting to ease and unemployment claims are increasing which shows that the Fed interest rates are starting to have an impact on the economy. As inflation comes back down to the 2% level then businesses who have been contracting will want to expand again and look to grow.


As a business invests it improves its own prospects for the future hence increasing its valuation. Arguably, a lot of inefficient businesses are likely to go bust as the downturn bites so when we come out of any downturn the companies that are left are stronger, healthier and they are therefore more investible. Combine with that the fact that the Inflation Reduction Act is starting to make a lot of money available for green projects (including the recent $9.2bn loan for the Ford EV battery joint venture) and the future looks positive.



The case for the Bears

There are a number of reasons why the market should have gone down recently. These include the continued strong jobs creation and the Fed stated intention of raising interest rates further which will ultimately have a negative effect on the economy. Yet the markets seemed to shake this off in the past couple of weeks as we got the push up.


But look closer and you'll see that what is actually happening is that we are back in a tech rally space. The stocks rising recently and pushing both the Nasdaq 100 and S&P 500 up are technology stocks. And those tech stocks are rising on the back of AI Hype; as AI is touted as the panacea solution for all problems known to the human race.


What's more it is only 8 stocks that have driven the growth in both the Nasdaq 100 and the S&P 500, so the two indexes are artificially inflated and effectively acting in exactly the same way. If the AI bubble bursts then both will drop.



With the current market volatility, it's hard to tell whether the market is overbought or not. However, with Inteligex Trading Software you don't have to second guess. The software uses cutting-edge artificial intelligence algorithms to analyze market trends and predict market behavior with a high degree of accuracy. So you can take advantage of any overbought market conditions and capitalize on them.



If you're interested in improving your trading or auto-trading solutions then come talk to us, we will help.



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