S&P Overbought Conditions Signal Correction Risk

about 1 month ago

"This is a monthly chart of the S&P going back 25 years. It is rare that we have been this overbought. So the last 25 years, we've only been as overbought as we are right now. 1 2 3 4 5 six times. Each time of those that we've been this overbought has led to a decent correction. This next correction, if it just reverts to its running bullish trend right now, is about a 26 27% correction. If it ultimately reverts to its long-term mean, that's a 60% correction. But this is why you have to be very careful with risk assets in this environment."

The speaker highlights that the S&P has reached overbought levels rarely seen in 25 years, having occurred only six times before. Each instance of such overbought conditions led to a significant market correction, with potential near-term declines of 26-27% on current trends or up to 60% if reverting to long-term averages. This serves as a cautionary note regarding the volatility of risk assets.