As the S&P 500 Hits Its 47th Record High in 2024, Investors Should Proceed With Caution

The U.S. stock market's remarkable performance in 2024 shows no sign of slowing down, with momentum building as more sectors and companies join the rally. This surge has propelled the S&P 500 to reach its 47th record closing high of the year on Friday, marking a significant milestone. Additionally, the index notched its sixth consecutive week of gains, its longest winning streak since December of last year.

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The Dow Jones Industrial Average and Nasdaq Composite have also experienced notable gains. The Dow achieved its 40th record close of the year, while the Nasdaq, although not quite back to its July peak, is approaching that level. This sustained rally has confounded skeptics at every turn since the bull market began in October 2022. More sectors are contributing to the S&P 500’s upward movement, making the rally less dependent on the handful of megacap tech stocks that fueled much of the market’s growth in 2023 and early 2024. The number of large-cap stocks showing positive trends has increased since the summer, and even small-cap stocks are starting to benefit from the upward momentum.

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Despite this optimism, some analysts are raising concerns about the potential risks that may be lurking beneath the surface. On Wall Street, there is a growing sense that investors might be becoming too complacent, with some even accusing others of suffering from what has been termed “invincibility syndrome,” a condition where investors feel immune to market risks. MarketWatch’s Jamie Chisholm reported on Friday that this sentiment is causing unease among certain market participants.

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Strategists at Citigroup cautioned that the high valuations of stocks mean that future earnings reports and economic data must continue to exceed expectations. A team led by Scott Chronert at Citi noted that back-to-back gains of over 20% in major indices, combined with economic data that has managed to avoid recessionary conditions, have created an atmosphere of complacency. This could leave the market vulnerable if those positive trends falter.

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In a separate report, Larry Adam, chief investment officer at Raymond James, highlighted several indicators related to sentiment, positioning, and valuation that have prompted him to adopt a more cautious outlook on the market. Among the concerning signs is the Cboe equity put-call ratio, which tracks trading activity in bearish put options versus bullish call options tied to individual stocks. Last week, the ratio dropped to 0.44, its lowest level since July 2023. Historically, such low levels of the put-call ratio have often preceded market pullbacks, as they suggest a high degree of optimism and reduced demand for downside protection.

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Another red flag is the leveraged long positions in the S&P 500 through futures contracts. According to data from the Commodity Futures Trading Commission, asset managers' net-long positions in S&P 500 e-Mini futures have remained above one million contracts for four consecutive weeks, a stretch of bullish positioning not seen since just before the COVID-19 crash in February 2020. The current net-long position represents over $306 billion in bets that the market rally will continue. However, these positions are typically leveraged, which means that any sudden downturn could lead to a swift and painful shakeout.

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Brian Allen, chief investment officer at institutional investment manager CS McKee, observed that the market is showing signs of stretched positioning, not only in the futures market but also in general investor sentiment. He noted that stocks are back in vogue, with a lot of buzz around owning high-flying names like Nvidia and Netflix. Allen described this fervor for stock market investment as reminiscent of previous periods of market exuberance.

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In addition to these signals, insider buying has slowed significantly. According to Jason Goepfert, chief research analyst and founder of SentimenTrader, the number of insiders buying shares in their own companies has dropped to levels last seen in September 2021. Insider buying, while not a perfect indicator, has historically provided valuable clues about whether stocks are cheap or overpriced. The decline in insider buying could suggest that executives and other insiders believe stocks are becoming too expensive.

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Goepfert also remarked that overall market sentiment appears elevated, and the market may be on the verge of complacency. Nonetheless, he noted that stocks can continue to climb as long as momentum remains strong, though he is watching for signs of weakness in individual stocks before becoming more concerned about a broader market pullback.

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Valuations, too, are looking increasingly stretched. One popular metric used by Wall Street professionals is the forward price-to-earnings ratio, which compares the price of the S&P 500 relative to the profits its companies are expected to generate over the next year. Earlier this week, this ratio reached its highest level since July 2021. When using a different valuation metric, the price-to-revenue ratio, the S&P 500 appears even more expensive than it did in 2021. In fact, the index is now more richly valued than it was in September 2000, just before the dot-com bubble burst.

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Michael Kramer, portfolio manager and founder of Mott Capital Management, expressed concern about the high valuations, stating that the market looks expensive no matter how one analyzes it. He added that the high price levels raise the risk of a correction, especially if earnings or economic data fail to live up to expectations.

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From a technical standpoint, the S&P 500 is approaching overbought territory. The 14-day relative strength index (RSI), a popular momentum gauge, reached its highest level since July earlier this week. Historically, when the RSI rises above 70, it signals that the market may be overheated and ripe for a near-term pullback. Larry Adam of Raymond James echoed this sentiment, suggesting that these technical indicators often act as contrarian signals, indicating that the market might be due for a period of consolidation or correction.

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In conclusion, while the U.S. stock market continues its impressive run, several warning signs are beginning to emerge. Elevated sentiment, high valuations, and stretched positioning all point to potential vulnerabilities that could lead to a pullback if the market’s positive momentum falters. Investors should remain vigilant as they navigate this historically strong, but increasingly expensive, market.

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