The Security and Exchange Commission’s (SOX) index has reached its most overbought levels since late 2017, according to a recent Nomura report. This indicates that investors are pricing in significant upside potential for the market, with call skew rising and put skew falling. The chart below shows the SOX index reaching new highs while call options become more expensive.

The increase in upside fears can be attributed to several factors, including improving economic conditions, rising corporate profits, and a generally bullish sentiment among investors. However, it’s important to note that this overbought condition does not necessarily guarantee a market correction or crash. In fact, the SOX index has historically been resilient in the face of market volatility, and its ability to recover quickly from setbacks has been well-documented.

Despite this optimism, it’s important for investors to remain cautious when dealing with overbought markets. Historical data shows that these conditions often precede market corrections or crashes, so it’s crucial to stay vigilant and adapt to changing market conditions. This may involve adjusting portfolio allocations, implementing hedging strategies, or simply taking a wait-and-see approach until the overbought condition subsides.

While the current state of SOX suggests significant upside potential for the market, it’s important to remain vigilant and adapt to changing market conditions. By staying informed and prepared, investors can make the most of this overbought market and potentially reap significant rewards in the long run.