S&P 500 Continues To Defy Gravity, Overbought Territory Signals Caution

The S&P 500 breached the 5000 mark Friday after flirting with the record-breaking level on Thursday, buoyed by increasing positive sentiment that the Federal Reserve will apply six rate cuts this year.

The Bureau of Labor Statistics said Friday the Consumer Price Index inflation adjustments for the final quarter of 2023 remained unchanged at 3.3%. Markets are now looking ahead to Feb. 13, when January’s CPI data is set to be released and analysts anticipate a notable slowdown in the yearly headline inflation rate, dropping from December’s 3.4% to 3%.

The stock market has been defying gravity since Jan. 19, pointing to new all-time highs during almost every trading session. The move has been driven by the Magnificent Seven, with five of the mega-cap stocks soaring to new all-time highs over the last few months.

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While for traders, the trend is your friend, both the S&P 500 and the SPDR S&P 500 (NYSE: SPY) have reached overbought territory, which suggests at least a short-term pullback is likely on the horizon.

More experienced traders who wish to play the SPY either bullishly or bearishly may choose to do so through one of two Direxion ETFs. Bullish traders can enter a short-term position in Direxion Daily S&P 500 Bull 3X Shares (ARCA: SPXL) and bearish traders can trade the inverse ETF, Direxion Daily S&P 500 Bear 3X Shares (ARCA: SPXS).

The ETFs: SPXL and SPXS are triple leveraged funds that track the movement of the SPY, seeking a return of 300% or –300% on the return of the benchmark index over a single day.

It should be noted that leveraged ETFs are meant to be used as a trading vehicle as opposed to long-term investments.

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The SPY Chart: The SPY’s relative strength index (RSI) was trending near the 72% area on Friday, indicating the ETF has reached overbought territory. When a stock’s or ETF’s RSI surpasses the 70% mark, it can be a sell signal for short-term technical traders.

The SPY has been trading in a steep uptrend since Oct. 27, making a fairly…