Stock market overbought, experiencing minor selloff: Yardeni

The S&P 500 pulled back nearly 3% since reaching a new record high of 5,667.20 on July 16, mainly due to news that the Biden administration is considering stringent measures to restrict foreign companies from selling chipmaking machinery to China.

This news particularly impacted semiconductor stocks, with ripple effects felt across the Magnificent-7, including Nvidia (NASDAQ:)

According to Yardeni Research, the recent developments have been quite confusing as investors have been rotating out of Tech and the Magnificent 7 stocks since July 11. This happened when June’s lower-than-expected CPI figures convinced investors to invest in interest-rate sensitive stocks, given the widespread expectation that the Federal Reserve will start lowering interest rates in September.

“We agree, but we also think that could be a one-and-done rate cut for 2024 because the economy remains resilient,” analysts at Yardeni Research commented.

“For now, we believe that the stock market was overbought and is experiencing a minor selloff,” they added.

On July 16, the S&P 500 was 15% above its 200-day moving average, a level historically associated with subsequent selloffs. These selloffs typically result in 10%-20% corrections when recession fears do not materialize, and more severe bear markets when they do.

At the moment, all losses remain below 10%, with only four of the 36 S&P 1500 sectors showing gains. The Magnificent-7 index has dropped by 4.6%.

The research firm also pointed out business and investing columnist Michael Brush’s comments on insider buying activity, noting that it remains light due to earnings season lockdowns.

“But what action there is continues to suggest caution, judging by index buy-sell ratios,” Brush told Yardeni Research. “There was selective buying in biotech and a financial sector name that imploded on earnings news.”

The S&P 500 dropped 0.71% on Friday, closing at 5,505.00.