With the news of massive infrastructure works and the rescue of Detroit by the US government, the stock market continues to rally. Today’s rally put the S&P 500 index just barely above the previous swing high. We now have a higher low and it looks like the market is working on putting in a higher high to cement a change in trend.
But when I looked at the moving average of the daily advance decline numbers, I was shocked to see just how overbought the market is. Take a look at the data for the NASDAQ:
By the way, there is nothing magical about the number 11, I just chose it because it is short term enough to remove the lag inherent in any moving average. Here is the NYSE data for the same market internals, which show that we are now at levels last seen back in the summer of 2003 and 2004:
While this does mean that we are extremely overbought at the moment, it doesn’t automatically follow that this is bad news for the bulls. While I was entertaining these thoughts, Jason Goepfert wrote at SentimenTrader.com that:
There have been 13 times when the 10-day average of the ratio has been 63% or greater, and today’s reading was 79% or higher. A month later, the S&P 500 was positive all 13 times, averaging +4.8%. Three months later, it was still 13-for-13, but the average return climbed to +8.6%.
Lowry Research continues to be skeptical that we have seen the bottom. But more and more “experts” pile on. Just recently, Fleckenstein announced that he would be shutting down his short hedge fund and begin working on a long only fund.
The one caveat that Lowry dangled in their analysis is that the market needs to show follow through. In previous rallies it just couldn’t put together a decent push higher. But with sentiment becoming more pessimistic as the indices continue to climb, we may just have the right sort of environment for that.
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