Here's Our Game Plan for This Once-Again Overbought Market

* The S&P 500 and Nasdaq Composite notched fresh record highs, but both are now overbought.

* A market pullback would take some of the froth out of the market, allowing us to put our shopping list to work.

We are easing into the last trading day of the week following yet another set of record highs for the S&P 500 and the Nasdaq Composite. Following a string of such records, stocks are lower in early trading and we can see the same for the yield on the 10-year Treasury.

Helping inch that yield lower, May import prices in the U.S. fell by 0.4% from the previous month, the first price decline of the year and another sign of inflation progress. However, both the S&P 500 and the Nasdaq Composite are back in overbought territory with their respective relative strength indicator (RSI) at 72.82 and 77.05. For newer members, a stock or market index is overbought when it is above 70 and oversold below 30.

That both the S&P and Nasdaq are overbought at the same time should not come as a surprise given the small grouping of stocks that have been powering the market higher. We see this rather clearly when we look at the S&P 500 Equal Weighted Index, which lags year-to-date returns for both the S&P 500 and the Nasdaq Composite, and has an RSI of 48.51.

The state of the market, following its latest bout of strength, could lead to some profit-taking by traders and shorter-minded investors. We recently took some of our chips of Nvidia NVDA, Qualcomm QCOM, and Costco COST off the table, and while we are inclined to let those names and other winners run, Universal Display OLED and Nvidia are approaching levels that could lead to some prudent register ringing.

Next week brings the Juneteenth holiday which will have markets closed next Wednesday, splitting the trading week in two. With many grade and high schools finishing the school year, the holiday and the start of the summer vacation season could result in lower-than-usual trading volumes next week. Toss in the overbought nature of the market and it will lead us to tread carefully while we keep watch on our shopping list of stocks. On that list, you’ll find Trade Desk TTD, Labcorp LH, Waste Management WM, ServiceNow NOW, and Builders FirstSource BLDR.

Given the more than 8.5% move higher in the S&P 500 since late April, we would not be surprised if the market experiences a pullback. Over the last one 95 years, the S&P 500 has averaged three pullbacks of 5% or more every year. If that were to happen, with the S&P 500 P/E multiple on expected 2024 EPS bumping up against the highs set over the last two years, we would view it as healthy for the market.

It would also give us a reason to tap our shopping list. We have just under 10% cash in the portfolio’s coffers, so barring any register ringing that would bring some additional cash into the fold, we will have to be selective with any next moves.

As we prepare for that, we’ll be revisiting EPS expectations for the coming quarters relative to the S&P 500, but also noting which companies in the portfolio are entering their seasonally stronger times of the year. Some of those are Apple AAPL, Qualcomm, PepsiCo PEP, Coty COTY, Universal Display, Amazon AMZN, and Costco.

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At the time of publication, TheStreet Pro Portfolio is long NVDA, QCOM, COST, OLED, TTD, LH, WM, NOW, BLDR, AAPL, PEP, COTY and AMZN.