Jim Cramer: Indicator Shows Stocks Are 'Way Overbought'

Investment guru Jim Cramer warns that one indicator he follows shows that the current stock market is “way overbought.”

The CNBC host said he is concerned about one market indicator — a product called the S&P Short Range Oscillator.

“The S&P’s proprietary short-range oscillator ... currently stands at eight, and that’s not just overbought, it’s way overbought,” Cramer said on CNBC.

Cramer says the oscillator is the single best indicator of whether the market’s overbought or oversold, meaning it tells investors they’ve gone too far too fast in one direction, CNBC.com explained.

“Historically, I haven’t made much money buying stocks when the oscillator’s at eight, in the same way I haven’t made much money selling stocks when it’s at minus eight — a classic sign that we’re extremely oversold,” Cramer said. “At these levels, the buyers usually run out of ammo, just as the sellers get exhausted when we go down too far, too fast,” he said.

“The oscillator is rarely wrong, and it’s telling me you’re likely to get a better entry point,” he said. “When in doubt, remember: Discipline always trumps conviction, and right now my discipline says don’t buy.”

The S&P 500 closed on Thursday within striking distance of a record high hit in July, as trade concessions from Beijing and Washington helped stocks recover from a sluggish start to the week.

If early indications hold, markets are set for their third straight week of gains, having already recouped losses from August when escalating trade tensions and the inversion of a key part of the U.S. yield curve drove investors toward perceived safe-haven assets, Reuters said.

U.S. President Donald Trump calmed markets on Thursday after saying he was potentially open to an interim trade deal with China, although he preferred a comprehensive agreement.

“If you are hoping for a trade deal, the comments that President Trump made are probably the best you could expect right now,” said Robert Pavlik, chief investment strategist and senior portfolio manager at SlateStone Wealth LLC in New York.

However, Pavlik added that a trade deal - interim or otherwise - was not likely to be signed before the 2020 presidential election.