In our Week in Review newsletter released every Friday to Bespoke Premium clients, we provide sparklines of the S&P 500 and its ten sectors along with where they are trading relative to their normal trading ranges (one standard deviation above and below the 50-DMA). In this format, viewers can quickly and easily see where each sector stands relative to other sectors and itself over the last year.
Heading into this week, the S&P 500 and seven of its ten sectors are trading at overbought levels, while no sectors are oversold. The Industrials sector is currently more overbought than at any other point in the last year. As we have seen since last March, overbought markets can stay overbought for several days or weeks. It isn't until an event occurs that gives the market an excuse to sell-off that the correction comes. We saw this in late November with the Dubai debt concerns as well as in late January when Washington proposed strict new taxes and legislation towards the Financial sector and Greece ran into debt trouble. In each case these concerns blew over and the market rallied after brief pullbacks.
Today, the market finds itself in a similar situation with the passage of health care reform. The market has known that a bill could and likely would pass for some time, and the market has rallied in the face of this. We don't see yesterday's vote as marking the end of the bull market, but with markets as overbought as they are, it could give investors an excuse to sell.
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