Markets Are Overbought, But On With the Party

Includes: QQQ, SPY
by: TraderMark

The unshortable market continues. Even losing some of the "generals" doesn't seem to matter anymore. We are now at the halfway point of December and despite a huge run for the month, the two major indices (I don't consider Dow Jones to be useful as it is 30 stocks and price weighted) have each only suffered one day of drops: A crushing 0.1% drop in the S&P 500 on Dec. 6 and a debilitating 0.5% loss in the Nasdaq on the 13th. Other than that, every other day is a non-stop win (or tie).

Just another in a series of V shaped moves (that were once rare) since QE1 began. Truly the only time this market acted normally these past 1.75 years was in a short period in late spring/early summer of 2010 when we were in between QE1 and QE1.5 (when the Fed decided it needed to begin buying Treasuries to keep its balance sheet from shrinking and before QE2 was announced) Each time I think to myself this market is overbought and needs a rest, I have to remember - this is not a market with normal price discovery ... overbought is only a state of mind. Dick Arms stated this morning, using his Arms index, the market is the most overbought in the nearly 50 years since he started the measure.

It has been nearly 50 years since I invented the Arms Index (also known as the TRIN) and wrote about it in an article for Barrons. Since then, the Index has had many big swings, most being very good signals. Now, in terms of both the five-day and the 10-day moving averages, the Arms Index is at its most overbought levels ever.

We did have a few drops during the QE 1, 1.5, and 2 campaigns such as July 2009. But other than a few weeks in November 2010 when Europe temporarily interfered with the "we can only go up or sideways" market, this has been a non-stop party since Jackson Hole, Wyoming, in late August.

Obviously at some point we are due to consolidate a now soon to be four-month move ... but a lot of fingers have been severed trying to use any historical pattern as to when this time will come. I continue to be amazed all the "free market capitalists" on certain TeeVee channels are applauding the Fed's intention to inflate assets... I guess intervention is super cool as long as it pushes things in the "right direction" versus a true market value.

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