How Really Overbought is the Stock Market?

October 25th, 2011
in b2evolution

by J Clinton Hill

arrow-up Whenever the stock market advances along a hyperbolic curve, investors rightfully ponder its overbought status. Today, I would like to answer the question “how really overbought is the stock market?”.

I am not going to rant in a long diatribe about the fundamentals or technicals. Instead, I will simply use a quantitative indicator to measure the percentage of stocks trading above their 20-day moving average and compare it to the S&P 500 index.

Follow up:

The results over the past year show that whenever this indicator (i.e. “$%>20″ exceeds @ 80%), the market has a tendency to correct itself, especially when the indicator crosses under its 13-day exponential moving average.

Although the indicator is currently trading above its 13-day exponential moving average, it resides in extremely overbought territory and MACD is flashing signs of negative divergence. Meanwhile, the S&P 500 has broken out above another consolidation pattern and stands ready to challenge any nearby ensuing resistance levels. If it can surpass the horizontal line I have drawn (see chart below), very few technical barriers stand between it and $1350+.

Anything is possible, but it would be a statistical anomaly for the market to maintain such a high percentage of stocks above their 20-day moving averages for an extended period without some type of correction. Chance favors she who is most prepared, so beware of this situation and especially a confirmation signal of the indicator crossing below its 13-day exponential moving average.

Until then, keep Hillbent on the Market Direction…

Stocks Above 20 Day Moving Average_10-24-2011

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