Is the stock market over-bought yet?

The relentless rally we have been experiencing since late March has many investors wondering if we have finally become so over-bought that a downturn is imminent. Our indicators suggest there is still a ways to go.

In this post I will not address the subject of whether it is appropriate for the exuberant stock market to be so divorced from the underlying macro-economic situation. This will be a quick discussion of some technical analysis indicators that may help us gauge where we are and where we are heading.

Our Market Radar page doesn’t get a lot of traffic but it has some very useful charts. Let’s start with the following chart:

This chart shows the S&P 500 (red line) versus the Number of Stocks Above their 20-Day Exponential Moving Average (blue line) versus the Number of Stocks Above their 50-Day EMA (gray line).

The number of stocks above their 20-Day EMA is getting up there toward the seriously over-bought level; however, the number of stocks above their 50-Day EMA has a ways to go before the over-bought level is reached. Note that we always seem to peak when the number of stocks above their 20-Day EMA rises above 3000 out of the 6000 stocks and ETFs that we track. We are almost there. Also note that the number of stocks above their 50-Day EMA typically peaks just shy of 3000. We are not yet there but we are getting within spitting distance.

This suggests we could have another two or three weeks of stocks ripping upward before we hit the point where both of these indicators peak and we can expect a downturn to begin.

On a final note, if you look at the chart, you will see that though the numbers of stocks above the 20-Day and 50-Day seems to rise and fall dramatically, it doesn’t always follow that downturns will be deep. In our case today, if the economy starts catching up to investor expectations, the coming pullback could be relatively mild like those in June and August of 2019.

For other indicators on our Market Radar page, check out the Market Valuation Indicator (not yet at a point where we can say the market is seriously over-valued) and the Trend Score Change Oscillator (currently hitting a peak indicating we are clearly in over-bought territory but also indicating that many stocks are participating in the rally lately).

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