Thursday, September 17, 2009

Chart of the Day: S&P 500 Most Overbought Since 1983

The chart above comes from the good folks at Bespoke Investment Group.

It shows the how far the S&P 500 currently trades above its 200-day moving average. Currently, the SPX sits more than 20% above that long-term average. This is an extreme overbought reading, and its also the highest reading in this indicator since 1983.

That's a pretty surprising statistic, and one that supports the notion that the market has run too far to make new buys at these levels. I have been raising a little cash, and will look to use any pullback to try to buy some things lower.

Beyond that, the interesting thing about this statistic is that while 1983 was the first year of the big market liftoff that started in 1982, it was still the beginning of a multi-year bull market. It was not a good long-term sell signal.

Sometimes being overbought can be a good thing. In this case, earlier this year the market got the most oversold its been since the 1930s, so the fact that we're not at an extreme overbought condition could just be a reflexive more back to more "normal" levels in the market.

Regardless of trying to nail the next short-term wiggle in the market, I think the market will continue to work its way higher into year-end and next year. I think it is likely that at some point we will reach those pre-Lehman levels of 1200 on the S&P 500.


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