The stock market is officially overbought right now, and I think its time to take profits.
The Oscillator
The Overbought Oversold Oscillator has been mostly in overbought territory during the first quarter of 2012 — and it should have been. The market should have went up in 2011 and got caught up in overseas fears. Stocks had some catching up to do.
The market was cheap before this run up, so there’s a lot of room to run. On 12/16 the S&P 500 had a P/E of only 12 (the lowest I’d ever seen it). Right now the P/E on S&P is 14. The market will probably keep going higher until it gets a 16 P/E, I just don’t think it will be a straight line up.
DJIA
The chart of the Dow shows a market that’s been up-up-and-away since the week of 12/16/2011. That’s the last dip you see on this chart to the right. Everything is perfect. Too perfect.
Right now I’m concerned with some of the stock charts. Lots of stocks have run higher without a correction. Stocks go up and down, and lately they have only been up. Everybody is bullish, and I’m leaning the other way for once. It feels like we have’n’t had a rainy day in months. But that doesn’t mean its not going to rain anymore.
Perfect Charts
I’m seeing perfection in a lot of stock charts. Since the week of 12/16, Apple (AAPL) has had three down weeks out of seventeen. During that same period Priceline.com (PCLN) had one down week, Intuitive Surgical (ISRG) just two and Chipotle (CMG) only one.
CMG’s gone from $318 to $418 — 31% — without a breather. The only week it was down it opened at $357 and closed at $356 — going down less than a dollar for the week.
So if you owned CMG you had no reason to sell. But what’s bound to happen is a little drop in the stock’s price will lead to profit taking — and an even lower stock price. Then more selling. If you bought at $318 would you let CMG drop to $318 before selling it?
Bottom Line
We’re due for a correction, and with the market overbought this is a good time to take profits. I still like the big tech names, but companies with P/E’s over 40 might be as high as they can be.
Disclosure: At the time of publication clients of David Sharek owned shares of AAPL, PCLN, CMG and ISRG. Family owned shares of AAPL & PCLN.