We often say that it is positive for an emerging bull trend to get heavily overbought – that this is an indication that the rally is strong and broad. In this article, we’re going to put that statement to the test by identifying (and quantifying) severely overbought markets and seeing how they performed up to 100 trading days later. This should provide some solid evidence of whether we need to relish or fear a severely overbought market.
The broad market, as measured by the S&P 500 Index ($SPX) remains in a bullish uptrend. The recent selling has drawn the index down from the top of the bullish channel that has defined this uptrend since early June (see Figure 1), but it only pulled back about halfway through the channel.
Equity-only put-call ratios are mixed. The standard ratio (chart, above left) continues to decline nearly every day. Thus it remains on a buy signal. The weighted ratio has now curled upward and is marked as a sell signal.
The long-awaited correction appears to have begun. So far, the damage is minimal and is completely within the realm of an overbought correction. However, all declines start out looking “normal,” so we must be alert as to the possibility of a more serious technical breakdown.
The stock market continues to be resilient, if dull. The bears have not been able to force prices downward, despite what was a very overbought condition a week ago.
Equity-only put-call ratios remain bullish. Both the standard and weighted ratio have now made new lows for this recent move, and that confirms their buy signals.
Yesterday's market was one of the quietest days so far. $SPX had a total range of 5.34 points for the entire day. That is minuscule. In recent months, this sort of action has only been a precursor to further upside movement – and it wouldn't be surprising to see it happen again. Of course, there are still overbought conditions, but we would expect any correction to be short-lived and probably contained by support at $SPX 1430-1440.
The stock market continues to march higher, listening to its own bullish rhythms and eschewing the potentially bad news that has kept many investors on the sidelines.
Today's rally has taken $SPX all the way up to the upper band of the bullish channel that has defined this market since early June. That in itself is an overbought condition of sorts. Today's highs also exceed the late 2008 highs, so the next target is the late 2007 highs, near 1500.
As traders and investors express more of an appetite for derivative products, the research departments at the exchanges (primarily the CBOE) and at various creators of ETFs (Proshares, First Trust, Rydex, etc.) have been busily designing new products. In this article, we're going to look at a few that have recently been announced. There are probably many more, but these are receiving a certain amount of new publicity at this time.
The market continues to move higher, albeit at a very slow pace. The bears have been frustrated at mostly every turn, as one negative news item after another has been tossed aside in favor of the “risk-on” strategies dictated by the expected monetary easings from both Europe and the U.S.
Tuesday's action started out with a morning rally, and then spent the rest of the day giving a lot of it back. Overnight, though, S&P futures rose strongly, exceeding Tuesday's highs. They have given back some of those gains, but S&P futures are up 5 points in Globex trading tonight. There is now tentative support at 1430 – the lows of the last two days. Below there, the entire area between 1400-1420, where the market spend most of August, is support.