The stock market is in a clear uptrend, but is short-term overbought after a big run the last four weeks. I am assuming that the trend is up because the S&P 500, S&P 500 Equal-Weight Index, Dow Industrials, Dow Transports, Nasdaq 100 and Nasdaq Composite recorded new highs this week. The S&P MidCap 400, Russell 2000 and S&P Small-Cap 600 are lagging, but these three are within 4% of their highs. The PerfChart below shows, however, that small-caps, mid-caps and the Nasdaq 100 have outperformed the S&P 500 since October 14th. Even though small-caps and mid-caps have been lagging for months, they are not exactly dead and they are showing some relative strength over the past month.
The only problem right now is that the stock market is short-term overbought after a big run. Overbought, however, is a tricky term because stocks can become overbought and remain overbought in strong uptrends. Remember, it takes strong buying pressure to produce overbought conditions and strong buying pressure is bullish. As the PerfChart showed, five of the eight indices are up double digits in less than five weeks. Using the S&P 500 as the market proxy, we can see that the index stalled the last four days with doji forming the last three days. Doji indicate indecision that can sometimes foreshadow a short-term reversal. Even if we get a short-term reversal, I would not expect much downside and would look for support in the 2000 area. Notice that broken resistance and the early November low mark support in the 2000-2020 area.
Good trading and good weekend!
Arthur Hill CMT
