Another Sharp Decline Could Start at Any Moment

Get ready for another decline phase.

Granted, it’s hard to go against the current bullish momentum.

But all the conditions that set the stage for a bounce off the lows last month are now pointing to the potential for a decline. And it looks like that decline could get started at any moment.

Recall the situation the market was in five weeks ago…

Stocks had been selling off hard. The S&P 500 was deeply oversold and trading historically far below all of its various moving average lines. All of the technical indicators we follow were in deeply oversold territory. Nearly every financial television talking head was bearish – some were even expecting a Black Monday type of crash.

Those conditions led to the remarkable bounce that has recovered everything the stock market lost in early April.

Now, though, we have the opposite situation…

The threat of a global trade war, which caused so much turmoil last month, is deescalating.  So many financial television talking heads are preaching about the prospects of the stock market hitting new highs in the weeks and months ahead. And the technical indicators are in extremely overbought condition.

For example, the McClellan Oscillators for the New York Stock Exchange (NYMO) and the Nasdaq (NAMO) recently rallied above their upper Bollinger Bands and above the +60 level that marks extremely overbought territory.

Here are those charts…

The last time NYMO and NAMO were both in extremely overbought territory at the same time was in July 2024. The S&P 500 fell 8% over the next three weeks.

A similar move this time would have the index back below 5400 by early June.

Of course, the market doesn’t have to follow the same script it did last July. There’s no guarantee of a sharp decline. But it’s usually a bad idea to be buying stocks into extremely overbought conditions. It often makes more sense to be a seller.

Best regards and good trading,

Jeff Clark
Editor, Market Minute

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