The S&P 500’s 9.6% rally in three weeks is looking increasingly unsustainable to some market watchers.
Concerns about the gauge include the fact that stocks often rally on signs of softness in the U.S. economy because that means the Federal Reserve is less likely to continue raising rates.
But in the end, weaker data also is just that — weaker. In addition, some technical indicators are starting to look stretched.
Strategists tracked by Bloomberg predicted on average in mid October that the S&P 500 would end the year at 4,370, but the guage had already reached 4,514.02 by Friday’s close.
Rick Bensignor, a former Morgan Stanley strategist, suggested reducing exposure by midweek if the gauge rises to near 4,560 and completes a Setup +9, a technical indicator meant to identify potential trend reversals.
Matt Maley of Miller Tabak + Co. said in a note on Saturday that while markets currently cheer the weaker economic data, ultimately fundamentals will change enough to have a negative impact on equities.
“Eventually, the stock market is going to realize that a decline in inflation does not mean that the era of ‘free money’ has returned,” Maley said. Also, the S&P 500 has become overbought according to its relative strength index, “so it could/should be due for at least some sort of a short-term pullback soon.”