On August 19, 2011, the Dow Jones Industrial Average closed the week at 10,817.65 after reaching its near-term low of 10,588.54 on August 9, 2011. At such time, we published an article titled A Look at Long-Term Favorite Stocks as the Market Tests Previous Lows, which suggested that investors should possibly dip into buying long-term favorite stocks. Six months later, the market is now reaching towards 13,000 as it recently closed at 12,950.10 on February 17, 2012. Following such a gain of 19.7% from August 19 (gain of 22.3% since August 9, 2011), is it time to exit the market?
An important technical indicator is the Relative Strength Indicator (RSI), which can range between 0 and 100. The RSI was examined on August 19, 2011, as it stood at 34.29 for the Dow (with RSI for individual Dow stocks ranging between 19.89 and 55.36), after having reached a near term low of 19.89 on August 9, 2011. Typically, when RSI for a certain stock is under 25 to 30, it indicates that the stock is becoming oversold. When the RSI is above 70 to 75, it indicates that the stock is becoming overbought.
The low RSI readings in August 2011 provided some of the justification for possibly buying long-term favorite stocks at that time. Now, the 14-day RSI for the Dow is standing at 69.3, as the market is reaching toward 13,000. In addition, individual Dow stocks currently have a 14-day RSI ranging between 34 and 77 (see table below).
However, despite current elevated 14-day RSI readings, the market can still possibly move higher. As a matter of a fact, the RSI stood at 82.5 on January 23, 2012, when the Dow closed at 12,708 , and yet the market has rallied another 2% since then. More strikingly, on October 21, 2011, the RSI stood at 79.6, with the Dow at 11,808, and yet the market rallied another 9.7% since then. Clearly, the RSI is a short term indicator, and it is more likely to work as a possible buying indicator when it drops near 30, as opposed to a sell indicator when it reaches 70 or higher.
A closer examination also reveals that several Dow component stocks have appreciated in excess of 30% since August 19, 2011, including Caterpillar (CAT), Home Depot (HD), Intel (INTC), Cisco (CSCO), Disney, (DIS), GE (GE) and Microsoft (MSFT). Such stocks also currently boast elevated RSI, ranging from 59 to 77. Only one stock has actually dropped in value, Alcoa (AA), losing approximately 8.9% of its value.
In addition, it has also become imperative whenever analyzing the market, to analyze one specific stock (which is not part of the Dow Jones Industrial Average) that can have tremendous effect on overall investor sentiment: Apple Inc. (AAPL). Apple has reached market capitalization in excess of $466 billion, and it would not be surprising if one day it becomes the world's first trillion dollar company.
Apple currently has a 14-day RSI of 82.48. It has reached an RSI high of 96.18 on 2/13/2012, and its RSI has not dropped below 50 since 12/1/12. This is a clear indication that the general rule for selling stocks based on an RSI in excess of 70 is not always reliable.
From a price/earning analysis perspective, Apple continues to look extremely cheap vis-a-vis its expected earnings for 2012. As it is currently trading at over $502/share, any future announcement of a stock split, and/or dividend payment, will possibly propel it higher towards $600 per share. Such scenarios will undoubtedly also provide positive sentiment boost for Apple Inc.'s suppliers, in addition to Dow Jones Industrial Average technology components such as Intel and Microsoft.
Although gains in the market during the past 6 months may justify for some risk averse investors to take some profits, it is not very clear yet that the market rally has run its course. Tremendous liquidity provided by the Fed, in addition to indication by the FOMC that low interest rates are expected to be maintained through 2014, can both provide additional lift to the market. From a technical perspective, the 13,000 level on the Dow will act as a resistance testing magnet, and if breached, October 9, 2007 record high closing of 14,164.53 may seem within reach...
|Ticker||Company||14-Day RSI on 2/17/12||Closing Price on|
Alcoa Inc. Common Stock
American Express Company Common
Boeing Company (The) Common Sto
Bank of America Corporation Com
Caterpillar, Inc. Common Stock
Cisco Systems, Inc.
Chevron Corporation Common Stoc
E.I. du Pont de Nemours and Com
Walt Disney Company (The) Commo
General Electric Company Common
Home Depot, Inc. (The) Common S
Hewlett-Packard Company Common
International Business Machines
Johnson & Johnson Common Stock
JP Morgan Chase & Co. Common St
Kraft Foods Inc. Common Stock
Coca-Cola Company (The) Common
McDonald's Corporation Common S
3M Company Common Stock
Merck & Company, Inc. Common St
Pfizer, Inc. Common Stock
Procter & Gamble Company (The)
The Travelers Companies, Inc. C
United Technologies Corporation
Verizon Communications Inc. Com
Wal-Mart Stores, Inc. Common St
Exxon Mobil Corporation Common