The S&P 500, a leading indicator of the U.S. stock market's health, has been on a rollercoaster ride in recent months. It reached record highs in February 2020 before plummeting due to the COVID-19 pandemic. However, it has since made a strong recovery and hit new highs in 2021. But some experts warn that the rally may be overdone, and the market could be heading for a fall.
According to CNBC Pro, the S&P 500 stocks are in overbought territory based on their relative strength index (RSI). The RSI measures the strength of a stock's price action, and an RSI reading above 70 indicates the stock is overbought. CNBC Pro screened for S&P 500 stocks in overbought territory and found several companies, including Advanced Micro Devices (NASDAQ:AMD), Samsara (NYSE:IOT), Cloudflare (NYSE:NET), DraftKings (NASDAQ:DKNG), and Floor & Decor (NYSE:FND).
FS Investments strategist Troy Gayeski agrees that the rally may be overdone. He warns investors to get out now, stating, "this is just another bear-market rally bound to fail." Gayeski believes that the market is due for a pullback and recommends that investors take profits while they can.
Jeremy Grantham, the co-founder of asset management firm GMO, warns that the market could plunge by over 50% in a worst-case scenario. He cites high valuations and an overbought market as reasons for his concern. Grantham also expects pressure on the financial system to cause more trouble for the market.
Liquidity is also a concern for some experts. Reserve balances at the Federal Reserve have risen in recent weeks, indicating that liquidity is likely to make a big u-turn over the next couple of weeks. This could lead to a market selloff as investors scramble to raise cash.
In 2022, conditions were heavily in stock pickers' favor, but most trailed the market. This year looks worse, according to financial columnist James Mackintosh. He believes that the market's overbought status makes it difficult for stock pickers to outperform the index.
While it may not sound as exciting as a double-digit yield, sometimes keeping it simple and investing in an uncomplicated S&P 500 ETF like the SPDR S&P 500 ETF (SPY) can be a smart move. Warren Buffett, the Oracle of Omaha, has purchased shares of this ETF every single quarter for nearly five years. The ETF tracks the S&P 500 index and provides diversification across the market's largest companies.
Jeff Marks, the director of portfolio analysis at the Club, believes that the overbought market is due for a pullback. He points to Friday's decline as evidence that the market is vulnerable. Marks recommends that investors stay calm and not panic during market declines.
In conclusion, the S&P 500 may be in overbought territory, and warnings of a potential market plunge are growing louder. Experts like Troy Gayeski and Jeremy Grantham advise investors to take profits while they can, while others like Warren Buffett recommend playing it safe with a simple S&P 500 ETF. Whatever the strategy, investors should keep a close eye on the market and be prepared for volatility.