Are Equity Markets Approaching a Correction Amid Overbought Conditions?

The market is at a crossroads. The S&P 500 and NASDAQ have surged to record highs, driven by AI-driven optimism and a relentless rally in the “Mag 7” stocks. But beneath the surface, technical and sentiment indicators are flashing red. Let’s break it down.

Technical Indicators: Overbought to a Fault

The S&P 500’s Relative Strength Index (RSI) is in uncharted territory, signaling extreme overbought conditions. According to the WealthUmbrella Margin Risk Indicator, the market is currently at a rare reading of 13—a level that has occurred on less than 1.5% of trading days since 2009 [4]. Historically, this metric has preceded corrections with only 1-3% additional upside before a pullback. Meanwhile, the S&P 500’s 50-day moving average (6,349.35) and 200-day moving average (5,969.29) show a healthy upward trend, but RSI divergence against price action suggests weakening momentum [2].

The NASDAQ isn’t faring much better. Its 1-hour RSI is overbought, and the index is testing the upper boundary of an ascending channel. With a 50-day moving average of 23,172.30 and a 200-day average of 21,340.74, the NASDAQ 100 has seen a 6.5% surge in short-term momentum but faces the same risk of profit-taking [3].

Sentiment Metrics: Euphoria and Divergence

Investor sentiment is shifting from bullish to euphoric. The CBOE VIX Put/Call Ratio stands at 1.28, a 141.5% increase year-over-year and a clear bearish signal [1]. This ratio, which measures the demand for puts versus calls, has historically predicted market stress when above 1.0. Meanwhile, the VIX itself has dipped to 15.30, down from 16.35 the prior day, suggesting a temporary easing of volatility but not a resolution of underlying risks [5].

The most alarming sign? Divergence across key sectors. Semiconductors, the Equal-Weighted S&P 500, and even the VIX are decoupling from the S&P 500’s rally—a pattern that has historically signaled trend exhaustion [4]. The Mag 7 stocks, which have fueled this bull market, are also showing cracks: only a few have surpassed their 2024 highs [4].

Historical Precedents and the Path Forward

History doesn’t lie. When the WealthUmbrella indicator hits 13, corrections typically follow within weeks. The current S&P 500 support level at 6,100 points could act as a buffer, but the lack of immediate resistance means volatility is inevitable. For the NASDAQ, the upper channel boundary is a psychological hurdle—break it, and the bulls win; fail, and the bears take control [5].

Investors should brace for a potential 5-10% pullback in the near term. Defensive positioning—such as hedging with VIX-linked products or rotating into cash—makes sense here. But don’t sell your long-term winners just yet. The AI revolution isn’t over, but timing the top requires discipline.

Conclusion

The market’s technical and sentiment indicators are screaming caution. While the bulls have the upper hand for now, the risk of a correction is real. As the old adage goes, “Bull markets climb a wall of worry; bear markets fall a wall of worry.” Right now, that wall is starting to crack.

Source:
[1] VIX Put/Call Ratio (Market Daily) - United States - Historical Data & Trends [https://ycharts.com/indicators/cboe_vix_putcall_ratio]
[2] S&P 500 (SP500) - Technical Analysis - Medium term [https://www.investtech.com/main/market.php?CompanyID=10400521]
[3] Nasdaq 100 Index Technical Analysis [https://www.barchart.com/stocks/quotes/%24IUXX/technical-analysis]
[4] Is the S&P 500 Overdue for a Correction? 2025 Forecast & ... [https://io-fund.com/broad-market/sp-500-forecast-2025]
[5] S&P 500 and Nasdaq bully through their all-time highs [https://www.marketpulse.com/markets/sp-500-and-nasdaq-bully-through-their-all-time-highs/]