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Not over

 

Very overbought Nasdaq

Looking at the monthly charts of the S&P 500, Dow and Nasdaq 100, it is quite clear that US stocks are overbought. Their relative strength index readings are 75.3, 71.5 and 76.5 per cent, respectively. The 70 per cent level is typically seen as the RSI threshold above which a market is overbought.

 

S&P's past peaks

Overbought monthly RSI readings often feature at major tops on Wall Street. For example, the last three really major tops in the S&P 500 index - in 1987, 2000 and 2007 - were all preceded or accompanied by very lofty readings. But such overboughtness is not enough on its own to bring about a top. Look at the 1990s, when the market stayed overbought for the best part of five whole years.

The difference between then and now is, I believe, that while we were in a long-term bull market back then, we are likely still in a long-term bear market today. Barring quantitative easing being continued for years and probably in increasing amounts, I cannot see Wall Street staying overbought on its monthly charts for years on end. But this does not mean the market is in imminent danger of collapse, either.

 

Mild RSI pullback

It is important to stress that monthly overboughtness can be resolved in fairly unspectactular fashion. The S&P's mildly overbought reading as of early 1994 was unwound by way of a wholly forgettable 9.5 per cent dip in the market. At any rate, while today's overboughtness may be nearing that of 2007's, there is no need for disaster on the scale that followed.

At the same time, I would say that it is plain that Wall Street is now very overvalued. While I will not dwell on this fundamental factor, that doesn't mean that technicians should ignore it. In my eyes, it is one of the main reasons why I think the secular bear market since 2000 has not yet ended. History tells us that the odds of the S&P registering positive real returns over the next decade could be as poor as one in five.

While poor returns lie ahead, they may lie some way ahead. And I do not think they will be on the scale suggested by Brian Whitmer, whom I interviewed last week, and whose thoughts have since been written up (bit.ly/1bQx9o4) in response to reader requests. Another question I have had since is about the likely timing of the top that his firm is forecasting.

 

Dow's trendline "resistance"

I came across a projection for the Dow by one of Brian's colleagues this week, pointing out that a major resistance was at hand. A trendline drawn through the tops of 2000 and 2007 apparently cuts in at 16132 or so. I am not a big fan of trendlines as they depend too much on subjective interpretation. This one is especially controversial as it appears to involve a chart with a linear scale. When looking at periods of several years, best practice is to use a logarithmic scale, in which case this line would cut in around 16494.

I doubt we'll see a top at either level. This overbought, overvalued bull market is not over.