By The S&P 500 index has embarked on a remarkable journey, advancing for nine consecutive weeks. This unprecedented feat, last witnessed in 2004, has left the index in what experts call “overbought” territory as the new year unfolds.
Positive Momentum Signals Future Returns
While this overbought status may suggest a potential short-term pause in the rally, it also conveys a positive message for future returns. Jeff deGraaf, Chairman and Head of Technical Research at Renaissance Macro Research, highlights that such strong runs usually confirm momentum and sustained trends rather than posing a risk.
Decoding Overbought Conditions
In technical analysis terms, an overbought asset signifies that it has become overvalued, potentially rising too rapidly and too high. Analysts gauge this using indicators like the relative strength index (RSI), which measures the speed and magnitude of price movements.
Various other metrics assist analysts in identifying overbought or oversold conditions in assets.
Overbought Assets and Potential Pause in the S&P 500
The S&P 500, a large-cap benchmark, finds itself in a tactically overbought situation, according to market strategists. Charlie Bilello, Chief Market Strategist at Creative Planning, highlighted this issue in a recent post on social-media platform X. Although assets can continue to rise even after becoming overbought, there may be cause for concern.
Various factors contribute to this assessment. In the mid-60% range, 10-day advancers are indicating overbought conditions. Additionally, inflows into S&P 500-tracking exchange-traded funds have reached “excessive” levels. Notably, the performance of high versus low beta stocks is currently in the 98th percentile. High beta stocks typically exhibit greater volatility compared to the overall market, while low beta stocks are known for their relative stability.
Given these indicators, market watchers anticipate a potential pause in the upward trajectory of the S&P 500. However, any temporary setback should be viewed as an opportunity to strategically build long positions in new relative strength high names and industries.
In 2023, the S&P 500 experienced an impressive 24.4% increase and came within a mere 0.6% of its record close set on Jan. 3, 2022 (4,796.56). Similarly, the Dow Jones Industrial Average DJIA recorded nine consecutive weekly gains in 2023, the longest such streak since 2019, and ended the year with a 13.7% gain.
See: For potential factors that could disrupt the ongoing U.S. stock-market rally in early 2024.
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