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From Zero to Hero in Six Trading Days

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But being overbought might not necessarily be negative.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.


It's been the most extraordinary time in the markets lately. During the past 6 trading days, some (though not all) of the market-health indicators I follow, moved from extreme oversold to highly overbought.

One of them is what I often quote: percentage of stocks above their 10-day moving average which moved from a level of 10% on July 9 to 97% at the July 16 close while the S&P 500 gained 6.5%. That implies that 97% of stocks are trading above their 10-day moving average (somewhat intuitive given last week's broad decline, but still spectacular).

The last time we saw such a move was in March, when it took about 8 days to move from 8 (on March 9) to 98 (on March 18), via a 17% move in the S&P.

Last week, market internals looked quite bleak, with several momentum sectors breaking down -- such as agricultural chemicals, solar, steel, and so on. Even housing and retail had poor outlooks.

This week, propelled by oversold readings, the market quickly moved up. Guess where the strength has been mainly concentrated? It's in the sector we've often looked at -- technology, and especially the speculative arm, semis. (See my Buzz, Of Chips and Dips.)

In this context, I'm reminded of Charles Dickens' famous words: "It was the best of times, it was the worst of times… we were all going direct to heaven, we were all going direct the other way -- in short, the period was so far like the present period."

For once, I'm really tempted to say, "Charles -- just pick one."

Still, as long as it can be maintained, being overbought might not necessarily be a negative. In March, there was some erosion after the overbought conditions, but the market managed to hold on and build on much larger gains.

This time, the gain's been relatively small, and we need to see whether the market can retain some of it, especially since it's being pulled in opposite directions by good earnings numbers from the likes of Intel (INTC) and IBM (IBM), and not so much from Google (GOOG) and General Electric (GE).
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No positions in stocks mentioned.

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