The definition of the term “overbought” is:

“Overbought means an extended price move to the upside; oversold to the downside. When price reaches these extreme levels, a reversal is possible. The Relative Strength Index (RSI) can be used to confirm a reversal.”

And overbought was the question du jour here in Washington D.C. as in, “Hey Jeff, is the stock market overbought?” Our response has been, “Of course it is.” Indeed, since our bottoming call of June 3, 2019 the S&P 500 (SPX/2941.76) has leaped from its June 3 low of ~2729 to its June 21 intraday high of ~2964 in a relatively short 15 trading sessions. As Leon Tuey writes:

“As mentioned in my recent comments, every time the market stalls, anxiety sky rockets and each time the market drops 100 points or more, investors fear that it's the beginning of a bear market. Clearly, investors are still haunted by the last two bear markets and their fear has been reinforced by the two panics in 2018 and by the daily bombardment of ‘bad news’. This week, nervously, many are wondering why the market is stalling. Simple. The market is overbought, which is not surprising as from its December low to the June high, the S&P gained a whopping 26.32%. But as shown below, momentum peaked in April (and some in February). At the June high, however, momentum failed. Another reason is that bullish sentiment rose, but not excessively so. These reasons and this week's G20 meeting with all eyes glued on President Trump and Xi meeting on Saturday help kept investors at bay. Bears do not dare go short and investors are leery of committing new funds. Make no mistake, the pause is nothing more than a normal reaction to an overbought condition. Once rectified, record highs lie ahead. Despite this week's consolidation/correction, the market is showing sub-surface improvement as Advances outnumbered Declines for the past three days. In fact, if today's positive breadth is maintained at the close, the Advance-Decline Lines may well hit record highs again. Stayed focused on the major factors (which continue to give bullish readings) and do not be distracted by the ‘noise’.”

We believed the SPX was going to stall around the 2856 level, but the fore-reach of the market carried it higher than we thought. The stall, however, began on June 21 and extended into last Friday. Still, the primary trend of the stock market is bullish, and the breadth remains strong (chart 1). As Lowry’s writes, “On June 20th, the NYSE all-issues and our OCO Adv-Dec Lines reached new all-time highs together for the first time since May 3rd.” Surprisingly, despite a move to a new all-time high investor sentiment remains subdued (chart 2). Meanwhile, we are entering another earnings season and stock analysts are negative. To be sure, over the past month analysts have reduced estimates on a little more than 17% of the companies in the S&P 1500. Of course, we have seen this act before only to have earnings come in better than the reduced estimates. Still, the reductions have brought into question stock market valuations. Given the current estimates the SPX trades at 19.3x trailing EPS, which is expensive based on historic valuation metrics. However, it trades at 16.8x 12-month forward estimates. In past missives we have argued that in the current interest rate environment our work suggests the fair market price earnings multiple should around 19x.