SPX500 has healthy undertones despite being overbought

Source: www.tradingview.com

The SPX500 is overbought as per its weekly RSI (green rectangle), largely due to the artificial intelligence narrative. In this regard, some of the index's top constituents by market capitalisation, not surprisingly, are also overbought, contributing to the overall heat of the index. Examples include Meta, NVidia, and Amazon.com amongst others.

However, despite all the hype, there are signs that the general market is healthy and that the gains are not all AI related. On the contrary, the tech, healthcare and industrials sectors have hit new highs, with financials and materials just shy of new all-time highs.

Moreover, the Inveso S&P 500 equal weighted ETF (not shown) is also close to an all-time high and has charted a higher trough followed by a higher peak. I.e. the equal weighted index is trending up.

The rally persists despite the first expected rate cut for the year being shifted back from March to May and now to June. The expectations for seven rate cuts in 2024 have evaporated, yet the markets remain resilient. One of the reasons is that corporate earnings have been market supportive, with nearly 80% of companies that have reported having beaten Wall Street estimates. This is better than the historical average.

There is a possibility that the SPX500 will need to normalise along with its constituents that are overbought. However, given the health of the broader market, corrections at this point will likely garner interest by market participants, who would want to buy back in at lower and better prices.