Another week, another rally in the major US equity indices. To further contextualise the most recent stampede higher in stocks, here are some key points:
  • Given where implied volatility rallied to in late August, it is clear that too many people bought protection in the options market and sold stocks. Simple market logic thus dictates that when too many sell and few or no sellers are left, the only direction stocks can go is higher… and so they did in October and thus far in November.
  • Coming into October, many fund managers also had a lot of cash on the sidelines and as performance anxiety began to percolate and the market stopped going down, those fund managers had to aggressively chase the market higher. In other words, the fear of missing a rally forced the hands of those investors to pile back into the market.
  • Currently, fewer than 100 stocks in the S&P 500 are trading within 3% of their respective 52-week highs. In other words, the October stampede left most stocks lagging the S&P 500 itself.
  • As such, unless investors piled all their money into the S&P 500 they likely are still notably underperforming the market.

……

As of last Friday’s close, the S&P 500 – while morbidly overbought in the near term – is less than 2% off its all-time highs from earlier this year.
The MACD oscillator currently stands at the highest overbought readings since the year 2000 while that of the Dow Jones Industrial Average is at its highest overbought reading ever. Ever is a long time and my focus as such switches to individual sectors and stocks and away from the overbought majors.

Ready my full analysis HERE

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