S&P 500 Touches New High, Yet Key Indicator Signals a Stock Pullback

After trading in a volatile sideways range over the three weeks ended August 24, the S&P 500 Index broke out to a new all-time high this past Monday.

Fortunately, our subscribers are positioned correctly for this market.

That’s because the current reading on my proprietary Overbought-Oversold indicator suggests that the S&P 500 Index and stock prices in general will move lower over the next few days, with that indicator closing on Wednesday near its highest level possible.

The recent readings on both the cumulative advance-decline line and the cumulative volume index for stocks that trade on the New York Stock Exchange also suggest that stocks will move lower over the next few days, with the advance-decline line trending lower over the past three days.

The cumulative volume index, which compares the volume of trading in stocks that move up in price to the volume of trading of stocks that move lower on any given day, also declined considerably on Thursday.

The fact that leading indicators for the U.S. housing market suggest that economic activity in that sector of the economy continued to decline during August also suggests that stocks are due for a pullback.

Fed moves

Meanwhile, the U.S. Department of Commerce reported on Thursday that the year-over-year rate of increase in its Personal Consumption Expenditures (PCE) Price Index, which is the primary measure of inflation used by the Federal Reserve to determine the Fed’s monetary policy, remained above the Fed’s target rate of 2.0%.

That’s for the third consecutive month during July, increasing by 2.3% compared to the same month a year ago.

I expect the Fed to continue to raise its overnight lending rate, the federal funds rate, during the coming months and for bond investors to demand higher yields on bonds to compensate for rising inflation rates.

Such a development would bode poorly for the near-term future direction of U.S. stock prices.

That’s because the present value of any given company’s estimated future earnings is computed by dividing those projected earnings by market interest rates, and because the level and direction of any given stock is determined ultimately by the level and direction of its underlying company’s earnings.

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