No, we are not talking about the new Dwyer family puppy (and I thought my kids were spoiled), we are referring to the possibility of a market "paws" near current levels to catch its breath after a quick game of fetch. While there are no indications of imminent demise, there is clearly a broad based overbought condition due to the 4.2%, 4.3%, 7.2% and 6.4% gains in the S&P 500, Dow Jones Industrials, NASDAQ Composite, and Russell 2000, respectively since the last day of September.
Overbought In An Uptrend...While the various market indices may be up quite a bit very recently and overbought, it doesn't necessarily have to be bad. A common misperception in the marketplace is that overbought is bad. The last six months have shown how that isn't always the case. Textbook technical analysis suggests that overbought/oversold oscillators (we use a 14-period stochastic as our default) have different meanings depending on the current market trend. As the charts below show, all the major market indices are in a clear uptrend as defined by higher highs and higher lows.
...May Not Be Bad. Overbought/oversold in an uptrend helps determine when not to chase stocks higher and when to buy on weakness. As overbought readings are reached, chasing stocks higher in an effort to "participate" doesn't make sense because there is inevitably a pull back or pause that refreshes the buying enthusiasm - as was the case in the first trading sessions of October.
As we head into the heart of earnings season nothing has changed fundamentally or technically that would suggest a prolonged period of weakness directly ahead. What we do see, however, is the need for a puppy nap in order to avoid "chasing" our tail from a tired condition.
Dow Jones Industrial Average
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