Inside Markets — Overbought

The S&P 500 has gained +5.7% since the index broke technical resistance at ~4200. Thin leadership and narrow breadth on the approach to 4200 were reasons to remain tactically bearish.  The break above 4200 occurred in late May as cyclical sectors and small cap stocks advanced in response to unmistakable improvement in the US Economic Surprise Index (ESI).  The US ESI had spent 3 months in a consistent slide, and the recovery resulted in PMs closing out cyclical sector underweights.  Those groups caught a second wind on reports of China stimulus measures and disinflationary US data that signal an eventual end to the Fed’s tightening cycle.  But after five straight weeks of gains, the SPX now finds itself in overbought territory.  Equities can remain overbought or oversold for extended periods of time, but generally these swings last 2-5 weeks. Notwithstanding a material change in these themes, the index will encounter technical resistance in the 4500-4535 range.  There are countless reasons to be skeptical about the recent rally, but at the very least, the pain trade seems incomplete as cash remains a crowded long position.  A healthy consolidation to oversold levels above 4200 would be the right place to add equity exposure.