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THE OVERBOUGHT CONDITION COULD BE REASON FOR BULLISHNESS

22 September 2009 by TPC 4 Comments

According to Jeff Saut and Raymond James the recently “overbought” readings in the S&P 500 could in fact be positive signs:

recently much has been made about the S&P 500 (SPX/1068.30) being roughly 20% above its 200-day moving average (DMA @892), the widest margin since 1983. Accordingly, we went back and studied that timeframe, as well as the 1975 timeframe, given that both of those periods marked the beginning of new bull markets. Looking carefully at the nearby charts from our research affiliate Credit Suisse, we see that the S&P 500 first achieved the 20% “spread” in November of 1982, yet stayed some 20% above its 200-DMA until May of 1983. Clearly, there were pullbacks over that timeframe, but they were all shallow and brief. The 1975 experience shows much the same pattern. To us, this is the way we think it will play this time as well. In conclusion, while the stock market remains overbought – 92.4% of the S&P 500 components above their 50-DMAs, 94.6% above their respective 200-DMAs, and the SPX currently resting 17% above its 200-DMA – we continue to believe any ensuing “pullbacks” will be shallow.

This is excellent historical analysis and while I highly respect Mr. Saut and his work I would only add that the current market environment very different from the early 80’s. The early 80’s were characterized by low household debt, declining interest rates and very inexpensive markets. Today’s economic times are entirely different therefore it is safe to assume that the performance going forward will be entirely different.

Source: Raymond James

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4 Comments »

James said:

The consciousness is beginning to change. A few months ago nobody would say this and everyone said that we would have a MAJOR correction. Now people are beginning to say that pull backs will be shallow and we will move higher. Bullishness is still not extremely high for a crash though.

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# 22 September 2009 at 12:46 AM

Rob said:

There is unusual action in the SPY. It started trading below the .SPX yesterday for the first time in months. Even today with the market up about 0.5% on a weak dollar, the SPY is continuing to trade below the SPX but just slightly. (e.g. SPY 106.78, SPX 1069)

Since mid July the SPY has been trading between 1 and 4 points above the SPX (e.g. SPY 104.05, SPX 1037)

I assume that this means that buying of the index has been stronger than the underlying stocks while the market has been going up. Since the SPY is now weaker could that mean that more people are starting to sell the SPY short as a hedge or even a naked trade?

Am I reading to much into this?