Are the Markets Likely to Stay Overbought?

Should we consider the equity markets overbought? Let's have a walk through what the market is telling us.

We use the 200 day moving average as our "overbought" indicator. That is, the ratio of stocks trading above their 200 day moving average.

Historically, when the NYSE's and NASDAQ's moving average ratios moved above 80%, there has been a great chance of the major market indicies closing lower six months later.

Looking at the market now we can see that 75% of NASDAQ stocks and 88% of NYSE stocks are trading above their 200 day moving averages.

click to enlarge

By our own standards, we should now be considering a bearish view on equities.

So let's consider the environment of the last 200 trading days, from mid-November 2008 until now. This would encompass a trading period that I believe most of us would rather forget. One look at the current weighted Value Line Index tells us that the market's current momentum is still powering on to another multi-week high.

When taxi drivers and economists become share market bulls, we start getting worried. We have not seen that yet.

So having considered that we should we maybe now take a bearish view, we believe a bullish view is still in order.

Disclosure: Long IWM

Comments

[Tony Petroski:]

So your technical indicators can't be trusted, and you rely on the Taxi driver's opinion?

Aug 14 09:12 AM

[LT Trader:]

The 200 day ma provides similar buy points as the "Coppock" guide does; there have been two false buy "signals" from the Coppock since the mid-20's (the 2000-2002 bear market was one, but it ultimately made some money). For LT holdings, I'll wait until a Coppock sell signal occurred - when the Coppock curve turns down for the nth time and at a lower level than the first curve down).

Last Coppock buy earlier this year was around S&P 870, the last sell signal was around 1,500 and change. I bought on momentum a little earlier than the buy signal (around 750) since MACD divergences also were in place. I'll buy more for the LT if the market pushes down. Have some S&P puts in place to hedge for downside protection.

Aug 14 01:30 PM

[TheFounder:]

Th only way kown not to get hit is to sell too soon and leave dollars on the table. Is the author suggesting the readers to try and guess the top of the market? obviously that is impossible, so why wait when clearly markets are overbought

Aug 14 01:37 PM

[Daily Trading:]

Our indicators indicate & we look for confirmation across a wide variety of sources.

How do you do things?

On Aug 14 09:12 AM Tony Petroski wrote:

> So your technical indicators can't be trusted, and you rely on the
> Taxi driver's opinion?

Aug 16 09:35 PM