RED ALERT!!!

There's a warning sign known as the "Buffett Indicator", calculated by the ratio of total US stock market capitalization to GDP. Very recently, this indicator has been surging to levels rarely seen, with the S&P 500 trading at a striking 6,227.42 as I'm writing this article.

Buffett famously calls the market cap-to-GDP ratio "the single best measure of where valuations stand at any given moment."

When this metric soars, it signals the market is pricing in a much rosier future than the economy may deliver.

Historically, when the Buffett Indicator turns red, the S&P 500 is overbought, and with institutional volume spiking before a seasonal lull, the chances of a correction rise. This occurred in 2020 and 2022, with summer rallies leading to sharp corrections as volumes and sentiment waned. The July 2025 setup seems similarly poised.

Additionally, if you examine the RBC's fair value range* of 5,730 to 6,200, you'll confirm that, at this point, there are classic red flags for overvaluation.

With the S&P 500’s market cap surging and stocks trading above even the bullish end of RBC's fair value models, we’re entering a danger zone, meaning you should be extra cautious and tighten your risk management strategy.

But what do technical indicators like Bollinger Bands and the Relative Strength Index (RSI) - my favourite analysis tools - reveal about the market's underlying mood?

📈 S&P 500: Technicals Scream “Overbought”

The S&P 500’s RSI is sitting above 72, well into "overbought" territory (typically, anything above 70).

Bollinger Bands, which measure price volatility and also indicate when securities are overbought or oversold, show the S&P 500 hugging its upper band, another classic warning sign. When prices consistently touch or break above the upper band, history says a pullback often follows.

💡 Volume and Liquidity: The Summer Slowdown Trap

June closed with billion dollars being poured into the stock market, rebalancing a bearish trend that was raising skepticism amongst traders and investors.

If you're not new to this, you know that investors and traders step back in August, and this means that liquidity will typically thin out.

Lower liquidity means price swings can be sharper. If selling resumes or accelerates, the lack of buyers could amplify even a mild pullback into a steeper correction.

To be clear, no single ratio or technical signal guarantees a market move. But when fundamental overvaluation aligns with overbought technicals and heavy institutional selling ahead of a seasonal slowdown, it’s time to respect the risk of reversal. Even as bullish sentiment reigns.

ALTHOUGH THIS IS NOT FINANCIAL ADVICE, I STRONGLY RECOMMEND YOU REVISE YOUR STOP-LOSS AND TAKE-PROFIT LEVELS.

*RBC refers to Royal Bank of Canada, one of the largest and most respected financial institutions in North America. In the context of market analysis, "RBC’s fair value zone" means the valuation range that RBC’s research division estimates as fair for the S&P 500, based on their models and outlook.

RBC’s fair value zones are widely followed by institutional investors and asset managers as a benchmark for risk assessment. When major indices move beyond these zones, it often triggers rebalancing or profit-taking from large funds, amplifying any short-term volatility.