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S&P 500 may be running out of steam; Here’s why

S&P 500 may be running out of steam; Here's why

As the curtains fell on 2023, the US stock market bid farewell to a triumphant year, with the S&P 500 index flirting with its all-time high, a mere 0.5% shy. 

Fueled by a backdrop of eased macroeconomic conditions and the persistent surge in the AI sector, the broader market celebrated a remarkable year-to-date gain of 24.2%. 

However, as the new year dawned, a sudden downturn gripped the market, casting it into the red territory. The decline was mainly caused by a drop in Apple (NASDAQ: AAPL) shares and other tech giants among a surge in Treasury yields. 

Notably, one analyst believes that this may not be a fleeting setback but a signal that the recent market rally is potentially “running out of steam.”

Overbought positions and extreme market optimism

In a January 3 post on X, former money manager and stock analyst Puru Saxena hinted that the “last hurrah” rally that took the S&P 500 to a near-record high may be reaching its limits.

The expert named four key indicators pointing to why the market may be losing momentum.

Primarily, the market appears to be “rolling over from overbought positions,” Saxena said, meaning that the recent rally has pushed stock prices higher than their intrinsic value. This suggests a correction might be on the horizon as the market adjusts to a more realistic valuation.

Also, the analyst highlights that the NAAIM (National Association of Active Investment Managers) reading has exceeded 100, suggesting an extreme level of bullish sentiment among active investors.  

This level of optimism might signal that a significant portion of the market has already committed to a positive stance, leaving limited room for additional buyers.

overbought market positions, NAAIM exceeding 100. Source: Puru Saxena

Market overextension, rising yields

Thirdly, Saxena noted that as many as 80% of S&P 500 stocks are trading above their 200-day moving averages (MAs). While this indicates strength in the broader market, it could also signify overextension, potentially paving the way for a pullback or correction as stocks return to more sustainable levels.

The fourth factor listed by the analyst is rising bond yields. This is typically perceived as a headwind for stocks, particularly for sectors that are more sensitive to rates, as higher yields may make fixed-income investments more appealing.

It is important to note that Saxena’s thoughts do not represent Wall Street’s consensus as many analysts remain optimistic about further growth potential in the US equity market.

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