If you feel like the stock market has been defying gravity, you're right. The S&P 500 has been overbought for 31 consecutive trading days as part of a continuous rally that began on 12/1/10. While this type of gain is certainly not the "norm," there are 42 instances since 1945 where the S&P 500 has had longer winning streaks. As recently as 11/12/10, the market was overbought for 45 consecutive days, and in 1961 it was overbought for 94 consecutive days!
[Click all to enlarge]
The conventional wisdom is that what goes up must come down; therefore, an overbought stock or index is a better sell than a buy. When we analyzed the average returns of the 46 periods similar to this one, we found that over the next three and six months the S&P 500 has a 74% chance of gaining, and the average gain over six months is 4.74%.