Neartermed overbought markets suggest pullback

Quick one today, folks. Markets are looking a little stretched. Technical evidence suggests the SPX is not mega-overbought, but certainly getting a bit rich. Should investors be buying an S&P 500 index ETF right now? Lets look at a SPX chart and see where we stand.

You’ll note on the above chart that my basic rule of an overbought market index (not a stock) being 10% over its 40 week/200 day SMA is not quite being tested. We’re close… currently about 8% over the MA, and about 9% over the trendline. Note that the SPX did hit 10% over its MA back in July of 2023. It corrected sharply thereafter, as often happens. Based on this simple rule, I’d say that we either see a bit more upside to hit a 10% overbought status then correct sharply, or we see only a minor correction in the nearterm if we don’t see a finishing rally. Markets are more vulnerable month of January.

Note that neartermed overbought signals are coming from the stochastics indicator, and mid-termed overbought signal is coming from RSI. However, the MoneyFlow index (bottom pane), which I find to be quite good at spotting mega-overbought situations, is not at the top of that signal point, nor is it rounding over.

Below is the seasonal chart for the SPX. You can see that January has a tendency for some minor weakness. This, followed by flat markets in Feb and the first week or two of March. Seasonality is NOT something to trade on. But its pattern does line up with the potential for the neartermed overbought signals coming in from the above chart to come to fruition.

What ValueTrend is doing

We peeled a little out of our equity positions just before the holidays. We may peel a bit more out in the coming week or so. We are wary of the markets abilities to break its old highs (SPX 4800)  – proof will be in the pudding. If it breaks and stays above 4800, I’ll be a believer. Meanwhile, the neartermed signals suggest at least a wee bit of caution.

Of note

  • Our VT update newsletter is about to be released on Tuesday or Wednesday. If you don’t subscribe, you should. It is an abbreviated version of our client-only newsletter. In it, you’ll be privy to some of the direct trading ideas we enact in the VT platforms. Click here to subscribe.
  •  The TSX 300 & SPX 500 are below their highs from two years ago. A structured process can be superior to buy n’ hold in all but runaway markets. Our year-end performance numbers for the VT platforms should be posted on the website Tuesday or Wednesday.

6 Comments

  • I appreciate all your insights. I was very curious when you mentioned that you peeled a little out of your equity positions. This is very different from all the talking heads/pundits pushing further upside with the Santa Claus rally. How “overbought” do your positions need to be when you decide to lighten up those positions? What indicator(s) do you use to decide that it’s time to reduce positions? If I remember correctly from your other posts, you leg into and out of positions. Does that mean that you just legged out say 1/3 of those positions pre-holidays? Lots of questions but I’m trying to learn as much as I can. Thanks.

    Reply
    • Great question. FYI–I did describe my legging process in the Online TA course–hope you enrolled. For BUYING individual stocks, its really just buying in 2-3 increments as the stock (for example) breaks out. We often SELL entire positions, unless we are reducing a position that outperformed so much that its reached an overweight position within the portfolio

      When we decide to raise cash on a MACRO basis such as now, we leg out by selling either whole, or partial positions. Eg – right now we feel markets are overbought enough, per the blog, to raise about 15% cash. So we did half of the selling last week, and another half today. In this instance—-We took profits on 2 stocks by selling out completely–they were/are at technical resistance and targets. A bird in the hand, as they say. We also took half out of another position that is in an uptrend, but looks pretty obvious like it is stretched enough to pull back to its trendline/ 200 day SMA.
      Hope that example of real-life trading helps

      Reply
  • Hi Keith,
    Are you still bullish gold and XGD ( GDX)? XGD/GDX seems to be having trouble getting any lift and gold looks like maybe it has more downside especially if it breaks below 2000. Silver looking quite bad now.
    Appreciate your thoughts and happy new year.
    Mary

    Reply
    • Yes, gold needs to stay above $2000 – or at least only see minor short breaks of that level. Its hovering near $2050 now. The producers are lagging, we’d think they will catch up so long as gold does hold above that support level. We still hold one position in a producer ETF, and one individual gold/silver producer. We have a bit of a long termed view on gold (a year or two perhaps–that’s long termed to us!)–but again, you know me, it ain’t a long termed view anymore if support breaks materially (aka by lets say $50 and more than a week or so).

      Reply
  • That’s helpful. I always like to hear how portfolio managers exit positions. Too much of the industry just wants you to stay fully invested forever so that they get their fees. They don’t help investors manage risk. I live off my portfolio (no pension). So managing risk is critical. Markets seem stretched so I’m looking to lighten up certain positions as well.
    Thanks for your insights.

    Reply
    • I beleive I am one of the very few PM’s who discloses my moves in a timely manner. ValueTrend, BTW, was incepted because of my distaste for the industry and its practices, such as you mention.

      Reply

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