Are Stocks Overbought?

On Monday, the market sold off slightly. The sell-off was either a continuation of the selling pressure caused by the market being overbought after the Trump-speech rally or because the stock market finally realized rate hikes are coming fast and furious this year. In my opinion, the market shouldn’t have rallied after Trump’s speech because it didn’t have many policy details. I said the idea that the market thinks uncertainty is now a positive is ludicrous. The speech wasn’t necessarily a negative because he didn’t say anything that was against business, but he also didn’t explain the details of his tax plan or his views on health care. The S&P 500 has given up about 2/3rds of that huge rally on Wednesday of last week.

Secondly, as I mentioned, the stock market may be realizing the Fed is about to raise rates 3 times this year. That’s a quick pace considering, it hasn’t raised rates once this year. Historically, this is still a slow pace, but in recent history the Fed has raised rates 25 basis points per year, so it’s fast. The market is a fickle beast. In the past, stocks have shivered at the idea that rates would be raised once and now they’re accepting three hikes. In fact, they’re rallying when the Fed talks hawkishly. I don’t agree with the concept that bond yields can rise, while stocks remain expensive. The point bulls have been making for years is that multiples are high because bond yields are low. I understand that logic and now want them to remain consistent on it.

The chance for a rate hike in March is 86.4% which was an increase from 79.7% on Friday. It’s almost a done deal that the Fed will raise rates next Wednesday. The only thing that can move the needle is the jobs report on Friday. Given the low jobless claims, I don’t see how it will be bad enough to change the Fed’s decision next week. Three rate hikes by December is the most likely policy to occur according to CME Group. There is a 55.4% chance at least three rate hikes will happen this year.