Massively overbought

January 24, 20207 Comments

The US stock market is massively overbought. The weekly chart of the SPX, below, shows us how the market is running along the top of its Bollinger Band (BB), while it remains substantially over its RSI’s 14-day overbought zone. Take note of that same overbought environment in the last months of 2017. The excess was corrected from that runaway market in January 2018.

Statistics from by Sentimentrader.com suggest that when the SPX has run along its upper BB for 6 weeks, as it has now, the market has been positive less than half of the time one month later. Further, the SPX has not experienced a back to back (2 day) negative return of -1% for the recent 29 days. Again, according to Sentimentrader.com – this has historically resulted in positive performance only 44% of the time one month later, with a median return of -1.7%.

What these statistics tell us that markets have a below-average potential for positive returns over the next 30 days. As I like to remind investors – a below average potential with a tendency towards negative returns does not mean you will absolutely see a negative return over the next 30 days. Many of you know my “run across the quiet street versus run across a busy highway” example when I talk about such risk/reward statistics. You can cross a quite street (low risk) and still get hit by a car. You can cross a highway (high risk) and make it without getting hit. It’s not about absolutes, it’s about the odds.

The odds right now are for some type of corrective action in the coming month to take out the excess. Lets see if we can keep running across that highway, or not.

We’re holding a bit of cash, a bit of gold, and keeping an eye open as the market continues to defy gravity. We wont fight the chart, but we are wary.

 

7 Comments

  • We are still in the favorable period for stocks so I would continue to hold until end of April then reevaluate. Selling now might not only lose more gains and preventing you from getting back in later because of possible higher prices.

    If you have cash, definitely WAIT and buy the next dip (ie 3% or more).
    Bonds are not an alternative so safe to stay invested in mostly stocks.

    This does bring up another point that you need to get a dividend of at least equal to 2% or better in your investments. If not then you are playing the capital gains only strategy which requires more effort.

    Currently a balance of dividends and capital gains is the less risky and still a rewarding strategy.

    Reply
  • Keith – how long will you hold gold for? According to Thackray, the seasonal period will end shortly. Thank you.

    Reply
    • To me, gold bullion has resistance coming in shortly near $1600–if that breaks, we’re looking for $1800. I’ll hold for the time being and sell if momentum slows.

      Reply
  • DON’T THINK CORONAVIRUS WILL BE A MAJOR PLAYER IN THIS MARKET, UNLESS… WAITING FOR AAPL EARNINGS TO SEE IF IT IS A SELL ON THE NEWS MATTER. XLI, XLB AND XLE WILL LEAD THE WAY TO RESOLVE THE EQUATION.

    J.P.

    Reply
    • The virus may not be a major factor re a true bear market-but it seems to be the factor that is allowing the market to finally pull back from its overbought status. This is good news. We needed a pullback.

      Reply
  • Are the US Financials at risk now? I know the seasonable goes to April. Do you hang on?

    Reply

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