BULLISH FRENZY: S&P500 Rockets Towards 5000 Amidst Mounting Signs of Overheating and Imminent Correction !

BULLISH FRENZY: S&P500 Rockets Towards 5000 Amidst Mounting Signs of Overheating and Imminent Correction ! 

In January 2022, the S&P500  reached its peak at 4796.56, merely four months later. Now, after a full two years of investors clawing back to even ground, the market is once again edging towards the coveted 5000 mark.

Despite the recent surge in the market since the year began, optimistic investors are eagerly anticipating the next significant milestone – the S&P Index 5000. These milestones possess a magnetic allure, capturing the attention of investors. Interestingly, the time taken to reach these milestones continues to shorten, especially following the Federal Reserve's active adjustments in monetary policy.

However, these milestones hold little significance beyond being psychological markers or an opportunity for media spectacle. Nevertheless, the prevailing bullish sentiment suggests that the market may soon reach that psychological threshold, if it hasn't already.

But the crucial question we should be asking ourselves is: what is the most likely course of action moving forward?

Things seem to be following a familiar pattern. Just a few months ago, in October, with the market down 10% from its peak, investor sentiment was notably pessimistic about the S&P Index's prospects.

I received numerous emails questioning whether "the selling will ever cease."

In response, I penned an article outlining why "October Weakness Would Lead To A Year-End Run," citing factors such as the summer selloff, sentiment, positioning, and buybacks, which hinted at a potential upward push by year-end. Additionally, the pursuit of performance by portfolio managers further fueled this optimism.

Since then, there has been a remarkable turnaround in sentiment. Once again, investors are convinced that "nothing can halt this bull rally."

Interestingly, this echoes the sentiment discussed in the July 2022 report "Trading An Unstoppable Bull Market."

Back then, the S&P Index was on the verge of closing its fifth consecutive month of gains, with returns for the year standing at an impressive 18%. Despite the Federal Reserve's actions, the bullish momentum for US equities seemed undeniable.

That was just before the 10% decline in October.

History repeats itself, and investors are once again confident that we are in an unstoppable bull market. With the S&P index poised to break records by reaching 5000, it appears that nothing can deter the bulls. Yet, such unwavering confidence often precedes a shift in sentiment. The question is, what will trigger this change? Unfortunately, we may only know for sure in hindsight.

We do know that the market currently exhibits all the signs of a pending correction. Retail and professional investor sentiment levels are reminiscent of short- to intermediate-term market peaks. Various indicators, such as the investor sentiment ratio and the volatility index, suggest that the market is vulnerable to a short-term correction.

Furthermore, our composite gauge of weekly technical indicators has already reached highly extreme levels, historically signaling an imminent peak.

As always, extreme bullish sentiment and technical price extensions typically resolve themselves through a short-term reversal. However, this doesn't necessarily mean that the market won't reach 5000 first, as it likely will.

As the S&P Index nears the psychological milestone of 5000, it's important to note that the market's ascent continues to be driven by a handful of stocks. The disproportionate influence of the top-10 "Market-Capitalization" companies underscores this trend.

This concentration of winners and losers is further evident when comparing the relative performance of major markets since 2014. Apart from the Nasdaq, which is heavily weighted in Technology, other major markets have lagged behind the S&P Index.

Even within the S&P index, sectors other than Technology have underperformed since 2020.

Despite the S&P index reaching new highs and nearing the 5000 mark, the disparity persists between the "haves" and "have nots." While mega-cap companies enjoy earnings growth and market appreciation, earnings are dwindling for the rest.

These figures highlight the underlying issue.

Given the stretched technical indicators, bullish sentiment, and weak fundamentals, reaching 5000 may create a false impression of market health.

At some point, broader market earnings must accelerate, necessitating robust economic growth or a significant correction to realign valuations. Historically, it's often been the latter.

Interestingly, such price reversions frequently occur shortly after the market reaches a psychological milestone.