Caution Ahead: S&P 500, Nasdaq Composite Enter Overbought Territory

As you have probably seen, I’m filling in on Friday at the Daily Diary, but even so, I wanted to tie together a few things as they relate to our thinking about the market as it grinds higher and lifts the Pro Portfolio along with it.

To begin with, Friday morning’s May PCE Price Index report and the warmer-than-expected print for the core PCE price index were not constructive for near-term rate cuts. However, the drop in one-year consumer inflation expectations found in Friday's Final University of Michigan Consumer Sentiment Index is adding some support for those who call for the Fed to cut sooner rather than not.

However, we continue to think that next week’s June economic data, especially the pricing components found in ISM’s June Manufacturing and Service PMI reports, will be the data that matters more. Should that data confirm the tariff-led tick higher in input and output costs found in S&P Global’s Flash June report, we could see the market rethink rate cut probabilities.

But we have a fresh wrinkle in all of this, and that is the comment from U.S. Commerce Secretary Howard Lutnick that the White House should have 10 major trade deals to announce ahead of the July 9 deadline. We’ve said it before, and we’ll say it again: Trade deal wins are nice, but the final details of those trade deals matter far more as they will shape expectations for the economy and corporate earnings.

The concern we have is that, following the market’s spectacular recovery, the Nasdaq Composite’s relative strength index (RSI) has risen to 70.68 and into overbought territory, and the RSI for the S&P 500, is at 70.41, is right there with it.

In the Diary, a question was asked about the market oscillators, and I asked Bob Lang to weigh in. This is what he shared:

"I use the McClellan oscillator, and not the often talked about SPX oscillator. The McClellan is my preference — it is not overbought and just went positive yesterday from one day in the negative.

"An overbought reading on the NYSE oscillator is above 150, and the Nasdaq is 200. Currently 86 and 99, respectively, so firmly in positive territory.

"Breadth is strong today, better than 3-1, so unless there is some news, this will stick and carry over to next week (likely)."

Should the market continue to push higher, and we could see that happen as we put a cap on the current quarter with Monday’s market close, the greater the probability that next week’s June data, which begins on Tuesday, or trade deal details, could catch the market off guard.

We’ve already locked in some massive gains over the last few days in Microsoft MSFT, Marvell MRVL and Nvidia NVDA shares. Should the market melt up further today and Monday, we may be inclined to make a few more prudent moves.

At the same time, we’ll share that following Nike NKE liquidation comments last night, as well as the recent bankruptcy of retailer At Home, which will result in the closure of 26 stores and inventory liquidation, the recent pullback in the shares of TJX Companies TJX has not gone unnoticed. We’ll be spending some quality time with the company’s filings and working out some price target details as we revisit the current technical setup in the shares. As we do this, we’ll remember the market is overbought, but then again, it’s always good to be prepared.

As we close out this alert, we’ll share a reminder that the June Monthly Roundup will be published on Monday.

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At the time of publication, TheStreet Pro Portfolio was long MSFT, MRVL and NVDA.