An overbought market is a worry for traders but great for investors, according to Jefferies

By Jamie Chisholm

Critical information for the U.S. trading day

The last week of the month and second quarter is getting underway with the S&P 500 SPX sitting just a fraction off its record highs following a minor tremor in some popular technology plays, most notably Nvidia (NVDA).

The good news for equity bulls is that looming seasonal factors are supportive.

The Invesco QQQ Trust Series I exchange traded fund QQQ, which tracks the big-tech heavy Nasdaq 100 index, has risen for the past 16 consecutive Julys, according to Jonathan Krinsky, technical strategist at BTIG. The average July gain over that period is 4.62%, MarketWatch calculates.

Furthermore, Krinsky notes that the Nasdaq-100 has not suffered a daily retreat of 2.5% or more for 379 days, the longest run in history.

But it's such resolute market optimism that has some observers and investors wary that when sentiment does turn, it can be painful. When two of the prior three longest such streaks for the Nasdaq 100 finally ended, the index saw 16% and 18% pullbacks, Krinsky warns.

"We would not be surprised if a -2.5% day is coming sooner than later," he says.

Another data nugget that points to the stock market's bullish tone comes from analysts at Jefferies, who say "the market has been overly cheerful this year," with the S&P 500 recording a higher proportion of positive days - 56% - than its historical average of 52%.

Jefferies also accepts that such optimism can cause concerns among those wary of over-ebullience. "Between a higher 'win' rate and a still-low VIX, there seems to be a little bit of uneasiness spreading of late," say Jefferies strategists, in a note that published over the weekend.

However, they add: "That's usually a sign that stocks could have further to run."

Jefferies also addresses the message sent by one of the markets most closely-watched technical indicators: the 14-day relative strength index, or RSI. The RSI is a momentum gauge tracking an asset, where a move above 70 is deemed entering overbought territory, and a drop below 30 is considered oversold.

The RSI for the S&P 500 rose above 70 mid-month and stayed there for seven trading days in a row, the longest overbought stretch since December 2023, Jefferies notes.

Bears may consider that a contrarian signal to sell the market. But Jefferies emphasizes that the RSI is sending different messages to short-term traders and longer-term investors.

"As it turns out, an overbought 14-day RSI can be a signal for tepid short-term performance for the SPX, but it tends to be an excellent long-term performance signal," says Jefferies.

They've crunched the numbers and show that going back to 1990, the average five-day performance for the S&P 500 after its RSI hits 70 is just plus six basis points, and it was positive 58% of the time.

However, over the next 12 months the S&P 500 rose an average 12% and was positive 88% of the time. "Hard to be fearful of that," says Jefferies.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are mildly mixed as benchmark Treasury yields BX:TMUBMUSD10Y trade barely changed. The dollar index DXY is lower, while oil prices (CL.1) rise and gold (GC00) is trading around $2,325 an ounce.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              5464.62    0.61%  3.01%   14.57%  25.67% 
   Nasdaq Composite                                                     17,689.36  0.00%  4.54%   17.84%  31.10% 
   10-year Treasury                                                     4.256      -3.00  -21.40  37.51   53.19 
   Gold                                                                 2337       0.14%  0.08%   12.80%  20.91% 
   Oil                                                                  81.05      1.39%  4.18%   13.63%  16.57% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor's Business Daily.

The buzz

There are no notable U.S. economic data points due on Monday, but there are some Fed officials making comments, including Chicago Fed President Austan Goolsbee making a TV appearance at 8:30 a.m. Eastern, and San Francisco Fed President Mary Daly giving a speech at 2 p.m.

The data highlight this week is likely to be the personal consumption expenditure price index, the Fed's favored inflation gauge, which is due Friday.

The European Commission on Monday said it had reached a "preliminary view" that the rules Apple (AAPL) uses to manage its App Store were in breach of EU competition law.

Enerpac Tool Group (EPAC) will release earnings after Monday's closing bell.

Shares of crypto-trading company Coinbase Global (COIN) and bitcoin holder MicroStrategy (MSTR) are down 4% and 5% respectively as bitcoin trades near its lowest level since mid May.

Best of the web

AI took their jobs. Now they get paid to make it sound human.

The crazy economics of the world's most coveted handbag.

Stocks are having their best election year since 1976. What the rally needs to continue.

The chart

Assets under management in leveraged long U.S. equity exchanged traded funds have climbed to fresh peaks as the market rises and investors make more bets on further rallies, according to Callum Thomas at Topdown Charts. Meanwhile, leveraged short ETF AUMs are down to the low end of their range.

"I think it would be correct to call this a contrarian signal, and a sign of where sentiment and positioning is at right now," says Thomas.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   GME     GameStop 
   TSLA    Tesla 
   TSM     Taiwan Semiconductor Manufacturing 
   AMC     AMC Entertainment 
   AAPL    Apple 
   AVGO    Broadcom 
   AMD     Advanced Micro Devices 
   AMZN    Amazon.com 
   HOLO    MicroCloud Hologram 

Random reads

Dogs with nice personalities.

A very expensive space rock.

GB Olympics skateboard team has a 35-year age difference.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Check out On Watch by MarketWatch, a weekly podcast about the financial news we're all watching - and how that's affecting the economy and your wallet. MarketWatch's Jeremy Owens trains his eye on what's driving markets and offers insights that will help you make more informed money decisions. Subscribe on Spotify and Apple.

-Jamie Chisholm

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-24-24 0631ET

Copyright (c) 2024 Dow Jones & Company, Inc.