Where Are The Overbought Conditions?

I was noticing today that most of the major averages haven’t been hitting overbought conditions in their relative strength index. Readers of the blog know that we like seeing that during bull markets. It’s when averages, or stocks, or any asset class really fails to reach overbought conditions that we worry it might be in bear mode. Here is a blog post I wrote last summer explaining why it would be a good thing that US Indexes hit overbought levels. Sure enough, US Markets all hit those elevated momentum readings and markets ripped ever since. This is typical bull market behavior.

But not these days. I know I’ve been talking about these momentum divergences in S&Ps over the last few weeks and markets continue to grind higher. But on this most recent leg higher, we’re not even getting into overbought areas. At least not yet. In fact, some of the averages are no where near it.

Here is the Small-cap Russell2000 ETF:

3-12-13 iwm

Midcap 400 ETF:

3-12-13 mdy

The tech-heavy Nasdaq1000 ETF isn’t even close, and hasn’t been for a while:

3-12-13 qqq


3-12-13 spy

Dow Transports:

3-12-13 djt

Dow Industrials are really the only ones hitting overbought levels:

3-12-13 dji

If this market is going to keep rockin, then the bulls should want to start to see some overbought readings. Just like we were looking for last summer. That’s my opinion.

Now we don’t want to be shorting US Stocks blindly with no stops because of this. But it’s definitely another reason why we’re keeping a cautious stance on risk assets, specifically US Equities.

And on a side note, if we do indeed hit those overbought levels in RSI, it would be further evidence that if and when we get a market correction, that’s all it will be, a correction. However, if we roll over without reaching those elevated momentum levels, then I would have to say that it would increase the likelihood of perhaps something more than just a small pull-back.

We’ll see what happens…