Market Looks Overbought Short Term, Longer Term Could Be More Promising

Historically, the equity markets have been known to experience some of their largest declines in the month of October. Equity market returns in the just completed October did not fall prey to this statistic though. The S&P 500 Index (SPY) and the Dow Jones Industrial Average (DIA) had their best monthly returns in four years, both up by more than 8%.

Source: Advisor Perspectives

The recent strong equity market returns have pushed the market into short term over bought territory. However, looking at longer term technical indicators the market and its technicals resemble the October 2011 time period.

First, looking at shorter term technicals, the below daily chart of the S&P 500 Index shows the index’s MACD and stochastic indicators have moved into overbought territory. Both indicator levels are similar to levels reached in October 2011. The market return subsequent to 2011 has been resilient.

In comparing the same indicators on a weekly chart though, one can see the October 2015 and October 2011 levels are nearly identical as well with the MACD indicator experiencing a bullish crossover at both dates.

In terms of individual stock movement, the below chart shows nearly 80% of S&P 500 stocks are trading above their 50 day moving average as of Friday’s market close. In comparison, at the end of August, only 5% of stocks were trading above their 50 day moving average.

Only 52% of stocks are trading above their respective 150 day moving average. This is certainly an improvement over the 13% level in late August. The current level though remains below prior peaks in the mid 80% range.