{"id":1459820,"date":"2024-02-28T19:05:00","date_gmt":"2024-02-29T00:05:00","guid":{"rendered":"https:\/\/bugaluu.com\/news\/?p=1459820"},"modified":"2024-02-28T19:05:00","modified_gmt":"2024-02-29T00:05:00","slug":"overbought-stock-markets-often-become-even-more-overbought","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/overbought-stock-markets-often-become-even-more-overbought\/1459820\/","title":{"rendered":"Overbought Stock Markets Often Become Even More Overbought"},"content":{"rendered":"

Overbought Stock Markets Often Become Even More Overbought<\/span><\/p>\n

\n

Authored by Simon White, Bloomberg macro strategist,<\/em><\/p>\n

When stock indices display signs of overboughtness, they typically go on to outperform.\u00a0<\/strong>The S&P 500 and Nasdaq are overbought today, but there is little historically to prevent them from becoming more overbought before reversing.<\/p>\n

Market tops and market bottoms are different: the first is a process, while the second is typically an event that happens with more suddenness. <\/strong>The fact that market tops last a long time – often months – means they often display persistent signs of being stretched to the upside. That means overbought markets can go on to become more overbought, before finally capitulating.<\/p>\n

The S&P today is displaying signs of overboughtness. Annual returns in the index are mean reverting. The market recently reached its one-standard deviation line, but as the chart below shows it can become more overbought still.<\/strong> That\u2019s especially the case when the market is bouncing from very oversold conditions, which the S&P 500 was in late 2022.<\/p>\n

<\/a><\/p>\n

The S&P\u2019s 14-day RSI is also trading just below 70<\/strong> (above 70 and the market is generally considered to be overbought).<\/p>\n

If we look at the average forward returns in the index for all the times when the RSI is more than 70 (going back to 1970), we can see the 3-month return is about the same as the whole-sample average, while the six and 12-month returns are above their average.<\/strong><\/p>\n

<\/a><\/p>\n

Overboughtness not being an impediment to further gains can be seen even more clearly if we look at RSI internals, i.e. the percentage of S&P 500 stocks whose RSI is more than 70. This measure reached a series high at the end of last year,<\/strong> yet as we now know this did not lead to a selloff. Instead the market surged higher. <\/strong><\/p>\n

<\/a><\/p>\n

And at the same time, the market has become less overbought on this measure, with the percentage of stocks back down to 15.<\/strong><\/p>\n

When the market is overbought on the RSI internals measure (using 30 as a threshold, i.e. whenever more than 30% of stocks\u2019 RSI is more than 70), it slightly underperforms on a three-month basis, is about even on a six-month basis, but outperforms on a 12-month horizon.<\/p>\n

It\u2019s a similar story choosing another measure of overboughtness – the percentage of stocks in the S&P trading above their 200-day moving average.<\/strong> Using 70% as a threshold here, the market goes on to outperform on a three, six and 12 month basis.<\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nWed, 02\/28\/2024 – 14:05<\/span><\/p>\n

\u200bRead More<\/a>\u00a0<\/p>\n

\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

Overbought Stock Markets Often Become Even More Overbought Authored by Simon White, Bloomberg macro strategist, When stock indices display signs of overboughtness, they typically go…<\/p>\n","protected":false},"author":0,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1459820","post","type-post","status-publish","format-standard","hentry","category-news","wpcat-1-id"],"_links":{"self":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1459820","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/comments?post=1459820"}],"version-history":[{"count":0,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1459820\/revisions"}],"wp:attachment":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/media?parent=1459820"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/categories?post=1459820"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/tags?post=1459820"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}