Beware Overbought Market Conditions

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Includes: DIA, QQQ, SPY
by: Prieur du Plessis

Following the sharp increase in stock markets over the past few weeks, prices are looking overbought in the short term. The point is illustrated by the comments below from Bespoke Investment Group.

The dark red shading in the table below represents between two and three standard deviations above the sector’s 50-day moving average, and moves into this range are considered extremely overbought. As shown, not only are all ten S&P 500 sectors overbought (at least one standard deviation above the 50-day), but 8 out of 10 are in extreme territory. The Financial sector is the most overbought of them all at three standard deviations above its 50-day. The Materials sector is the least overbought at just under two standard deviations above its 50-day.

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And just to emphasize the point, Bespoke also shows that 100% of the stocks in the Financial sector are trading above their respective 50-day moving averages!

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Source: Bespoke Investment Group (here and here), October 27, 2011.