The S&P 500 index reached new highs following President Trump’s speech to Congress that promised increased infrastructure spending, lower corporate taxes, and less red tape for the financial industry. At the same time, billionaire investor Warren Buffett suggested that stocks are comparatively cheap based on where interest rates are in an interview with CNBC, and FactSet’s Earnings Insights showed two-thirds of S&P 500 companies beating Q4’16 estimates.

Despite these positive developments, the CME Group’s FedWatch points to a 68.6% chance of a March interest rate hike and FactSet’s data shows that two-thirds of companies issued negative earnings guidance for Q1’17. The combination of rising interest rates and slower earnings growth could force valuations to move lower, especially with the index’s price-earnings ratio standing at 26.9x - significantly higher than its 14.65x mean.

Technical indicators seem to confirm that equity valuations have become frothy and a downturn could be a possibility over the coming weeks. In particular, more than 400 S&P 500 components are trading above their 200-day moving average, which is the highest level in at least a year. The last time these levels were reached in early-2015 and late-2015, equities moved significantly lower to more rational price points from a technical perspective.

The S&P 500 index’s relative strength index (RSI) of 81.86 is a further sign of an overextended market with 70.0 being the upper bound for the indicator. However, the moving average convergence-divergence (MACD) remains in a bullish uptrend dating back to early-February. The key levels to watch at this point are R1 resistance at 2,399.57 and R2 resistance at 2,435.50, which could prove to be near-term resistance to the rally.

Traders and investors may want to take a conservative approach to the market after the recent rally given both fundamental and technical factors pointing to overbought conditions.

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