The Dow (DJIA) blasted past 15,000 this month — and is set to be up for the seventh straight positive month. Everything’s doing good now, including growth stocks which were laggards as dividend paying conservative stocks made up the majority of the 2013 gains through the first four months of the year.
Now we are at a bullish extreme, where the readings suggest a correction is due, but you can’t tell that from the action in the stock market. Right now the market is plowing higher, but there are concerns this rally might be topping off.
Investors Intelligence
First the Investors Intelligence reading, which shows the bullishness or bearishness of more than a hundred stock market newsletters, shows 52% bulls and 20% bears. The normal reading is 45% bulls 35% bears. This is a contrarian indicator — the more bullishness means the market is due to correct. That’s where we are now, everybody seems bullish. Which is dangerous.
DJIA
To the right is a chart of the Dow spanning the past six months. The index has gone a half-year with just one correction — in mid November. This move is almost straight up.
2013 has been the year of the dividend stock, and there’s lots of those in the Dow so this chart should look good. To get a better reading on if the market is overbought or oversold we should look at the Overbought Oversold Oscillator.
Overbought Oversold Oscillator
I originally had this chart showing less than six months, but then almost the entire chart was above the equator (0) and there wasn’t any oversold readings to speak of. I had to enlarge the view just to show the last time the market was really oversold, and that was in mid-November.
This oscillator is more accurate in detecting when to buy and sell than the chart of the Dow. Buy when the market is oversold and sell when it is overbought. Right now we are really overbought, this is a good time to take profits.
Sharek’s Take
Although everything is going up right now there are strong signals that the six-month bull move is nearing its end. The market isn’t behaving like it will correct so for now its best for long-term investors to stay invested, but if you’re a trader or are a bearish person by nature, now seems like a good time to take the money and run.
