Are Stocks Way Overbought?

Cobra

Stocks are overbought. http://seekingalpha.com/article/155137-are-stocks-way-overbought

 

And by overbought, I mean WAY overbought.

 

The relative strength index (RSI) is a metric used to measure the velocity and momentum of a given investment by comparing its upward and downward moves from close-to-close. If an investment is moving up strongly, its RSI is higher. Similarly, if an RSI is low, it means the investment is performing weakly.

 

Historically, RSI’s of 70 or higher mean an investment is overbought while an RSI of 30 means an investment is oversold. In these situations the market is primed for a “revert to the mean” trade, meaning you could see a quick correction or turnaround rally as the market snaps back to a more reasonably RSI.

 

Well, have a look at Friday's NASDAQ.

 

As you can see, the NASDAQ recently hit an RSI of 75. This is the highest reading we’ve seen in nearly two years. In fact, the last time the NASDAQ had an RSI of 75 was October 10, 2007, right before stocks entered their first major leg down in the Financial Crisis, losing 55% in six months.

 

As soon as I noticed this, I called up Ron Coby, a brilliant portfolio manager based in Medford, Oregon. Ron’s one of the smartest guys I know and when it comes to trading short-term moves, he’s one of the best in the business. What he had to say completely blew me away.

 

Ron said,“Graham, you won’t believe this, but I went back on the NASDAQ and made a note of every time it hit an RSI of 75. EVERY TIME, the market collapsed soon after. And I don’t mean a “plain vanilla” correction, I mean a full blown CRASH.”

 

Ron then forwarded me the following chart. Suffice to say, I was floored:

 

As you can see, the NASDAQ has hit an RSI of 75 or higher five times in the last 12 years. Every time, the market collapsed soon after with an average drop of -22%. In several cases, stocks suffered a full-blown CRASH.

 

This is a very serious warning for the Bulls. A high RSI doesn’t mean that stocks have to CRASH immediately. But it does indicate that the NASDAQ is more than ready for a serious correction. Again, an RSI of 75 or higher has only been hit FIVE times in the last 12 years. Two of those times were at massive historic bubble peaks. The others were all periods in which stocks were simply far too overbought. And ALL FIVE OF THEM PRECEDED SERIOUS CORRECTIONS.

 

Be forewarned, if stocks are this overbought, we’re in dangerous territory. If smart money like Ron Coby is worried and shifting to a defensive stance, I’m paying attention.

 

I suggest you do the same.

maimait

This should be a very reliable rating. Thanks a lot. Only thing is how much is the correction. To me less than 10% is reasonable and healthy for everybody. I just don't think it will blew 10%.

apollochil

Thanks!

snowwolf229

dara

wow, thanks, I will try to add some QLD PUT

coldcold

06年底好像也有一次，怎么没算？之后不是还涨了10个月？

snowball2009

Thanks for sharing

Cooker

开小差

thx, ding

seabiscuit

毛点点

Thank you

maxmartin

just curious what is the the time frame of the correction after, 6 months? a year?

layschips

06年底好像也有一次，怎么没算？之后不是还涨了10个月？
coldcold 发表于 2009-8-11 10:40

i'm not sure about this either. I think it's more reliable if it happens in a bear market rally. so the question returns to the classic one: are we still in such a rally, or in a new bull market?
personally i believe it's the former one, as I myself have a very bearish bias

one comment from the original blog that worth reading:
"    * chap08:
This is simply wrong. The NASDAQ hit an RSI of 75 in 2003, 2004, 2005 and 2006 without crashing.
A high RSI can simply be a sign of strength in the market. It is misleading unless the market is oscillating.
I'm not saying the market's going higher, I'm just saying decide on some other basis. "

blash

06年底好像也有一次，怎么没算？之后不是还涨了10个月？
coldcold 发表于 2009-8-11 11:40

就是，2007、4月27日也过了75啊。

还有这个好像只对纳斯达克有用？

最近也在看RSI真没看懂。

dividend_growth

大牛市开始时Nasdaq的RSI全部冲过70！

就算到了80市场还能涨很久：

1999年11月初，Nasdaq 3000点左右时RSI到了80，你做空看看！

2003年7月初，Nasdaq 1650点左右时接近80，后来涨到2004年一月下旬2150左右才开始盘整。
2003年9月初，Nasdaq 1800点左右时又到过80。

说实在的，Nasdaq从2004-2008突破70的RSI很多次，现在Nasdaq的RSI比这些年来根本不算什么突出的！

maimait

dividend_growth's big font looks really clear. thanks for the addtional info.

大牛市开始时Nasdaq的RSI全部冲过70！

就算到了80市场还能涨很久：

1999年11月初，Nasdaq 3000点左右时RSI到了80，你做空看看！

2003年7月初，Nasdaq 1650点左右时接近80，后来涨到2004年一月下旬2150左右才 ...
dividend_growth 发表于 2009-8-11 14:02

michaelzhang

Thx

Cobra

嗯，看来是这么回事，这个转帖不好玩。

trueself

大牛市开始时Nasdaq的RSI全部冲过70！

就算到了80市场还能涨很久：

1999年11月初，Nasdaq 3000点左右时RSI到了80，你做空看看！

2003年7月初，Nasdaq 1650点左右时接近80，后来涨到2004年一月下旬2150左右才 ...
dividend_growth 发表于 2009-8-11 14:02

Amy