The short answer: Yes, it appears to be. The somewhat longer answer: Yes, but (you knew this was coming) a number of indicators have been advising no less over the summer, and yet the market has continued to climb. Short-term timing decisions, in other words, remain as fraught as ever. But let’s press on anyway and consider some of the clues that imply the market is toppy.

Let’s start by noting that the trend remains red hot. The SPDR S&P 500 ETF (SPY), a proxy for US equities, continues to exhibit a strong upside trend. As such, the case for arguing the opposite relies on a hefty dose of contrarian thinking. As such, it’s still reasonable to wait for signs of downside momentum before going too far in engaging in hedging.
 

Yet it’s also clear that market valuation is lofty. The Shiller PE, for instance, shows that the market has been valued at a higher level only once since the late-1800s. That alone doesn’t mean that a correction is imminent, but it’s a reminder that the margin for error is wafer thin re: negative surprises.
 

Analysts have been making similar points this summer, such as this July 12 headline: “The stock market now is clearly overbought – but overbought does not mean ‘sell’”.

What’s the bottom line? That depends on the investor, along with a host of other factors, such as time horizon, age, risk tolerance, etc. Where you fall along this multi-factor spectrum will influence your decision on how or if to adjust your portfolio, and so generic recommendations definitely do not apply here. A 25-year-old investor with decades-long horizon can reasonably decide to ignore warning signs. Someone at or in retirement, by contrast, may want to think differently.

Meantime, a metric I monitor for gauging market sentiment tells me that the near-term outlook for the market appears overbought, based on this twist of estimating overbought/oversold conditions for the SPDR S&P 500 ETF (SPY). According to this indicator, the market is once again in elevated terrain that implies caution for the near-term outlook.
 

History suggests, although in no way guarantees, that as the Overbought-Oversold Indicator approaches and exceeds +1, the risk-reward prospects are skewed to elevated to the downside for stocks. Although the forecasting record is far from perfect, it’s not terribly surprising that as the indicator is near or above, corrections have been known to follow.

The current reading is 0.86, which is still modestly below +1, and so presumably the bull still has room to run. But if this indicator rises further, investors should consider what could keep the uptrend bubbling. Tech earnings? Economic resilience? Interest rate cuts?

Meanwhile, here’s my take: To the extent that that SPY’s Overbought-Oversold Indicator holds steady or rises from current levels, the market will be increasingly range bound until/if a new catalyst reignites bullish sentiment.

The market has already priced in a favorable outlook from artificial intelligence and other tech-related drivers that are skewing S&P 500 earnings to the upside. The question, always: What might the incoming news bring, and will that be enough to justify higher valuations and prices?

No one knows, of course, but this much is clear: There’s relatively little room for disappointment at this stage. That alone shouldn’t determine your asset allocation, but it should at least inspire a discussion of what you think you know and what you could be overlooking.

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