Market Brief - June 18, 2023
The major indexes closed the week up after the Fed kept interest rates unchanged. While inflation is falling, it still remains well above the Fed’s desired 2% target, and economic indicators are still foreshadowing economic weakness.
Both technical and sentiment indicators are now showing a market that is extremely overextended. We’d like to see a healthy correction before aggressively adding positions to the portfolio.
Russell 2000 (IWM)
IWM bounced off resistance at the cumulative average price since the index topped in November 2021 (red line on the chart). While the 10-week moving average and the AVWAP from January 1st (blue lines) are beginning to trend up, the bulls are not yet in control of the small cap index.
Nasdaq (QQQ)
QQQ has been in overbought territory for the better part of the past month, making a correction increasingly likely. We would like to see a healthy 7%-10% pullback before adding additional positions to the portfolio.
Dow Jones Industrials (DIA)
DIA briefly broke above $345 resistance, but then closed the week below it. Very little to learn from the chart. Outlook for DIA continues to be neutral until a breakout above $345.
S&P 500 (SPY)
SPY is looking overextended over the short term. RSI is now in overbought territory for the first time since the August 2022 high. We will continue to be cautious about adding positions to the portfolio until we get a pullback.
Market Sentiment
The CNN Fear & Greed Index is now at 82, which corresponds to extreme greed. The last time the index closed above 80 was on February 1, just before a 7.5% correction.
Bullish sentiment in the AAII Investor Sentiment Survey has been above average for 2 weeks in a row, while bearish sentiment is at its lowest level since July 2021. Extreme bullish sentiment suggests this market is overdue for a correction.
The bottom line: The technical and sentiment indicators are aligned in confirming this market is extremely overbought. We may add another position to the portfolio this week, but would like to see a healthy correction before taking any additional positions.