Wednesday, April 29, 2009

The Market Is Definitely Overbought, But...

What to do now is the question of the day for those investors with cash on the sidelines: and it is a lot of cash. Now is the time to take a step back and evaluate where the market was in early March and where it is today.

In early March, investors were selling. The media was talking about a major economic and market meltdown at that time. And I will be the first to admit, I was not too constructive on the market in early March either. Since that time though, the market has embarked on a significant advance. Some cautionary technicals noted in the below chart are the MACD is negative and volume has been declining.

(click to enlarge)

S&P 500 Index April 9, 2009Today the S&P 500 Index closed at 873 which is above its 150 day moving average of 869. The 50 day moving average appears to have bottomed and started to move higher. These factors are just a couple of positive technical factors.

Additional cautionary data is the fact that over 90% of the NYSE stocks are trading above their 50 day moving average. At the March 9th low only 7% of NYSE stocks were trading above their 50 day moving average. As the below chart notes, when the 50 day percentage gets into single digits, it is generally a good time to begin building positions in stocks. On the other hand, when this average is above 80%, the S&P does have a tendency to sell off or at least consolidate some recent gains.

(click to enlarge
1-year chart)

NYSE percentage stocks above 50 day moving average(click to enlarge
3-year chart)

NYSE percentage stocks above 50 day moving averageNow is the time to be selective in the stocks that are being purchased. There are companies trading at attractive values, but paying attention to stock fundamentals and dividend characteristics are important at this juncture in the market.

1 comment :

dacian said...


Thanks for this new blog.

Regarding the "cash on the sidelines" I have a different opinion. It's not the amount of cash sitting on the sidelines which drive prices. It's not that because we have more cash on the sidelines prices will go higher; we don't know if those money will go in stocks; they might go, but it's not sure.

Think about people who invested in 1999-2000. Most of them lost money to date, so I'm not sure that they are ready to experience the same thing again and give their money to Goldman Sachs and JP Morgan who are pushing the markets (9$ billions gains from trading - that's not to say I believe in manipulations, through they exists to a good degree from FED, big banks, etc.). Right now, people are hoarding and I'm not sure they are ready to bet on stocks.

Actually, it's the sentiment which drives prices. In 2005/2006 we had less money on the sidelines and prices were going higher. In January 2009 we had more cash on the sidelines with prices going lower. How do you explain this? I think it's healthy to put at rest some of the sayings we used to employ for the last 2 decades (markets know before the economy, markets always return to the mean, cash on the sidelines is at all time highs, etc. etc.) What do you think? thx