Patience in an Overbought Market


The rise in the major indexes since the election has been stunning. The S&P alone is up over 15% in just over 3 months. That would be a terrific year by any measure. The Dow was up 18% since the election at its all time high on Wednesday, And the NASDAQ was up 17% during the same period when it hit its all time high on Wednesday.

In looking at the Dow I am seeing things that I haven't seen since 1987, 2000 and 2007. In other words, overbought technicals that come along rarely. Just look at the chart below and you will see that at its high last week the Dow had stochastics of close to 100 and a RSI of near 90. And it's the second time in just a few months the Dow got so overbought and lasted for a lot of days in a row, the most recent 13 straight days higher, something that has not happened since 1987 when the market experienced a major correction.

We all know that the market can remain overbought for an extended period of time; we're witnessing that right now. But being so extended makes it very tricky to get aggressive to the long side when the market could correct significantly with traders' holding the bag.

This is why we have gotten very defensive at EarningsBeats, holding off issuing any new trading alerts for the past few weeks now. There's no way I would short this power house of a market so the next best thing is moving to cash - which is a position - which is exactly what we have done. This can result in some frustrating moments like when the Dow surges 300 points in one day. But that was followed by a 100+ point down day as traders started to smell a near term top.

I've decided to conduct a Webinar this Tuesday, March 7 at 4:30 PM eastern. I will be joined by Senior Technical Analyst Tom Bowley and we will be talking about stocks that recently beat earnings expectations and could be strong trading candidates, especially on any pullback, as well as the overall market in general; a snapshot review. In fact, we will be adding over 100 stocks to our "Candidate Tracker" of stocks that beat earnings expectations that will be made available to our members and will share some of those with webinar participants. If you want to join us for this Free Webinar just click here to register. We expect a packed house so try to sign up soon.

It is very tempting to jump all in when the market is rising and showing such powerful momentum. But when the market gets too overbought you've got to be patient, not worrying about missing every penny. Having cash ready to deploy on a pullback makes a lot of sense and if done right can be quite profitable.

At your service,

John Hopkins

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