December Charts of Interest: Stocks Are Overbought

One commonality I came across as I was perusing candidates for this month’s charts of interest was a theme about how stocks have become overbought. Overbought and oversold are terms used in technical analysis to describe stocks that may have risen too far, too fast or fallen too far, too fast, respectively.

Late last week, Steven Strazza of All Star Charts tweeted, “At 44%, the percentage of stocks that are overbought in the S&P 500 is at its highest level on record.” He then added, “The only other readings above 40% were in June 2003 and June 2020. It’s not bearish ...”

Ryan Detrick, chief market strategist at the Carson Group, shared a similar statement. He tweeted, “More than 40% of the components in the S&P 500 hit [a relative strength index greater than 70] last week. Yes, we are super overbought, but we also see this type of action at the start of VERY strong moves.”

I’ll note that these observations came as bullish sentiment in our weekly AAII Sentiment Survey rose to 52.9%. This is just the third time it has topped 50% since the spring 2021.

Small-Cap Stocks Got Some Love Too

Staying on the subject of new highs, Charles Schwab’s Liz Ann Sonders notes that 14% of Russell 2000 index companies hit a new 52-week high last week. As she wrote, it’s “not [the] largest spike during prior bull markets, but still a positive sign.”

S&P 500 Valuations Are Higher Than Average

The S&P 500 index’s price-earnings (P/E) ratio is now above both its five- and 10-year averages, note the folks at DataTrek. This year’s stellar performance of the Magnificent Seven stocks is driving up the valuation of the market-capitalization-weighted index. At the same time, not all stocks in the S&P 500 are pricey. Cheaper valuations can be found in small-cap stocks.

A tailwind from a pullback on interest rates and the avoidance of a recession would help to support higher valuations.

Stock Ownership Is Rising Among Americans

Household ownership of stocks reached a record 58% in 2022. This is the highest level of participation in the stock market—either through direct ownership of equities or through funds, retirement accounts or other managed accounts—reported in the Federal Reserve’s survey of consumer services, according to The Wall Street Journal.

Direct ownership of stocks rose to 21% of households, which is also a survey record. The median value of stockholdings fell, however, signaling more participation by smaller investors.

Time For High-Quality and Low Beta Stocks to Outperform?

My expectation is that we’ll hear quite a bit in the coming months about what types of stocks have historically performed well after an interest rate hike. BlackRock says to keep an eye on higher-quality and low beta stocks. Quality stocks have done particularly well after past interest rate hike cycles have ended. (A+ Investor and Platinum subscribers have access to our Quality Grades. Our VMQ Stocks newsletter also incorporates the Quality Grade into its approach.)

Are Several Interest Rate Cuts Coming?

Federal funds futures traders are pricing the possibility of several interest rate cuts occurring in 2024. This morning, the CME FedWatch Tool signaled a 72% probability of interest rates being 125 to 175 basis points (bps) lower following the December 2024 Federal Open Market Committee (FOMC) meeting than they are now. This equates to between five and seven quarter-point (0.25%) interest rate cuts. The CME FedWatch Tool tracks fed fund futures contracts.

As I’ve said many times before, these odds are very much subject to change.

Mortgage Rates Are Coming Back Down

After the sharp spike we saw in October, mortgage rates are coming back down. Freddie Mac calculates that the average 30-year mortgage is 6.67%. It was 7.79% on October 26. This is a positive sign for homebuyers. I just wish more of the decline occurred before I locked in the mortgage rate on the house we’re closing on in a couple of weeks. Refinancing, here we come.

A Smaller Bite Out of Renters’ Pockets

“The median U.S. asking rent declined 2.1% year over year in November to $1,967—the biggest annual drop since February 2020,” says Redfin. The main cause has been “a building boom” in apartment buildings in recent years. Economic concerns and affordability are also issues at play.

None of this seems to have caught the attention of the developers near me. The new apartment complex built about a half mile from my house includes a three bedroom/two bath 1,424 square feet floor plan with listed rental prices of $4,282–$6,909 per month. Those apartments seem nice, but it’s an awful lot to ask considering that it’s located in a northern Chicago suburb.