THE OVERBOUGHT CONDITION COULD BE REASON FOR BULLISHNESS

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