Fed Meeting Preview: Why the S&P 500 is Dangerously Overbought

The S&P 500 is currently in an 'extremely overbought' state, but the negative advanced decline line suggests potential underperformance in the next three months, especially with the upcoming Fed meeting and other factors at play.

• S&P 500 is overbought with a negative advance decline, signaling potential underperformance.

• Sub-4% mortgage rates are unlikely based on current Fed fund futures pricing.

• Focus is on the Fed meeting and potential rate cuts.

The S&P 500 is currently overbought, indicated by it being over two standard deviations away from its 50-day moving average. This situation is unusual because the advanced decline line is negative, suggesting that more stocks are declining than advancing, which has historically led to underperformance in the following three months. The market is anticipating the Fed meeting, where expectations are set for potential rate cuts.

Market Weakness

• 00:00:38 The current week ranks as one of the weakest of the year for the S&P, a trend often seen in September due to the anticipation of the Fed meeting. Historically, September tends to be a weaker month, particularly in its second half, adding to the cautious market sentiment. The market is waiting to see what the Fed will do before making any significant moves.

Overbought S&P and Advanced Decline

• 00:02:08 The S&P has moved into an extremely overbought state, exceeding two standard deviations from its 50-day moving average, which can persist for an extended period. Typically, this overbought condition is accompanied by broad excitement and rising stocks within the S&P. However, the current advanced decline line is negative, indicating more stocks are trending lower, a rare combination that has historically resulted in market underperformance over the subsequent three months.

Mortgage Rates

• 00:07:10 Mortgage rates have recently decreased to their lowest point in the past year, hovering around 6%. Despite expectations that the Fed cutting rates might lead to lower mortgage rates, projections based on current Fed fund futures pricing suggest that a return to sub-4% interest rates is unlikely. The projected terminal rate is around 3%, which would put the 10-year yield just under 4%.

S Capital's Website

• 00:09:20 Mark Stevens, an early investor in Nvidia, sold a significant amount of his stock recently, and it was discovered that his venture capital firm, S Capital, uses a basic, free website built with Squarespace. The bottom of the website indicates it is powered by Squarespace. This illustrates that having substantial wealth does not necessarily require a sophisticated online presence.

Tomorrow's Earnings Reports

• 00:10:42 Cracker Barrel and General Mills are scheduled to report earnings tomorrow. Cracker Barrel's conference call is anticipated to be interesting, while General Mills has a mixed earnings history, beating expectations 73% of the time but missing six of the last eight reports. Additionally, Webtoon is partnering with Disney to create comics and cartoons, Microsoft raised its dividend, and Oracle is assisting TikTok with its operations.