Monday, March 14, 2016

Monday Morning Comments - Overheated?

We touched on our stocks up 50% in a month indicator a few weeks ago and highlighted how overbought the measure had become.  At the time, we stated that we weren't certain of what the reading was signaling since it happened so quickly and powerfully.  Could it be pointing to a big move higher was in store or had breadth already peaked leaving the market primed to roll over.  Well since that February 17th reading, it looks like it was signaling the former as stocks have seen a nice surge.

We wanted to circle back on this indicator and see where it stood today.  As of 3/9, the number of stocks up 50% in a month was again flashing major overbought readings.  In fact this is only the 3rd time since 2010 that this indicator has reached over 50.  The other 2 times were Oct. 28th and 31st of 2011 and  that was after the European debt crisis bear market.  The rally from the Oct 4th bear market low peaked in the short-term on Oct. 27th.  But after the Oct 27th peak the S&P 500 corrected a quick 10.4%.  It then went on to rally almost another 23% from the end of November 2011 until April 2012.

The current market has shown some similarities to the 2011 environment, particularly in its breadth thrusts up and down.  If things happen to play out like 2011, the current market is most likely closer to a short term top from which we'll see a pullback before resuming higher at some point later in the year.

2011 S&P 500

Current Market

Stocks enjoyed another week of gains thanks to Friday's big up day.

And now, with this multi-week rally in the books, the S&P 500 is down just 1% in 2016 after being down more than 10% at one point last month.

We'll see if stocks can continue to shrug off these short-term overbought readings and continue their march higher.  Have a great week.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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