23 April 2008

Overbought Condition of the S&P 500

Here is another way of looking at overbought/oversold stocks, albeit in a broader context (S&P 500) than my usual focus on the Dow 30. The following is from the Bespoke Investment Group blog, posted on April 18, care of The Kirk Report:

Overbought Stocks in the S&P 500
Currently, 47.8% of companies in the S&P 500 are trading in overbought territory. Overbought levels are met when a stock's price moves more than one standard deviation above its 50-day moving average. As shown below, this many companies haven't been overbought (green line) since the market peaked back in early October. Likewise, the last time so few stocks were oversold was also early October.

Below we highlight stocks in the S&P 500 that are the most overbought. When individual stocks get this overheated, the risk/reward tradeoff begins to favor the risk side in the short term. As shown, ETN is the most overbought, trading 4.29 standard deviations above its 50-day moving average. ETN is followed by ALTR, GD, NSC and BLL. Other notables on the list include CAT, SLB, ORCL, HAL and DD.
Regardless of whether these overbought levels cause a pullback next week, after the declines that we've had since late 2007, it's a relief to know that stocks can in fact go up.

Looking at the Overbought/Oversold chart, you can see that the percentage of stocks in the S&P 500 that were overbought approached ~60% during the big bull run of last April through June, and approached ~65% in October at the market peak. The recent market rally has not returned to those levels, but this is another interesting and useful piece of data to keep in the back of my mind, and accessible on this blog.

No comments: