Overbought is a tough condition – because the market can continue to be overbought for however long the market decides. But on Friday one of my overbought/oversold indicators reached an extreme I haven’t seen in a while. And that is why I sold into strength and also hedged my remaining positions. Let’s take a look.
Using Amibroker, I’ve created a few custom indices – in this case, I look at two measures: percentage of stocks in the S&P500 that have an RSI(2) greater than 90 or less than 10, and the percentage of stocks that are above or below a standard Bollinger Band. Here’s a chart:
That’s the SPY above and then the two separate measures below, with the Bollinger Bands first and then the RSI(2) measure. There are two lines for each graph – the green line shows buying opportunities (when the market is oversold) and the red line shows selling opportunities (when the market is overbought).
What’s special about Friday is that both of these measures surged into overbought – both at an extreme of over 70%. While this is more common during sell-offs – it’s much less common on the overbought side.
Now could the market continue up? Of course – but some caution is warranted in my opinion. So I took the opportunity to sell into the strength, raising some cash, and I also put a hedge in place for the positions remaining. If/when the market pulls back, my plan is to buy back.
Have a great 4th of July weekend!
