The S&P 500 thus far in 2013 has rallied just about 6.50% without any real consolidation in price. While the price action feels very extended, it does mostly so because of the one way uphill street we have taken so far this year. To put this in context however, just looking back 12 months reveals that this time last year the S&P 500 was about 2% higher and ultimately rallied around 13% year to date before a first better correction arrived in early April.
Furthermore, the below chart of the S&P 500 also reveals a pattern that has now repeated three time since October 2011. The pattern is simply one of consolidation followed by major breakouts. The first breakout occured in January 2012 and led to a little over a 12% rally. The second breakout came about in August 2012 and a little over a 6% rally ensued. The third breakout just came to pass in January 2013 and thus far has led to around a 5% rally as measured from the breakout point. Simply put, while stocks are extended near-term, from a pure price action point of view they certainly could rally further before a better correction ensues.
As it usually goes, the deeper into a rally we go the more selective the group of stocks moving higher becomes. In other words, as more and more stocks get overextended it becomes more difficult to pick the ones with further upside room. From this point of view it may be a good idea to just trade the index at this stage in the rally as opposed to try finding stocks to outperform.
As I browse the charts these days I see plenty of overextended stocks that haven’t come to take any breather yet this year. While I may be somewhat early still in leaning too much against these stocks in the near-term, if and when the broader market too finally reaches an exhaustion point, these will be ones worth shorting or at least trimming for those long the stocks.
Without further ado, here are three stocks that on my charts have reached dangerously overbought levels;
The Dow Jones Transportation stocks as a group have now more or less rallied 16% in a straight shot since their breakout in December 2012. Ditto for FedEx Corp (FDX), which is now a solid 15% higher without so much of a look back over its shoulder. The stock is also very extended past its 200 day simple moving average and has been flashing negative divergence to its momentum oscillators.
Next up, Manpower Inc. (MAN), which rallied more than 30% in a straight shot since breaking out past simple lateral resistance in December 2012 is much overextended. Just like FedEx Corp (FDX), the stock has really stretched its move past the moving averages and is just running on fumes in the near-term.
Last but by no means least, the broker/dealer group of stocks as measured by the AMEX Securities Broker/Dealer Index XBD has staged a 20% vertical rally since December that rivals any rocket launch. Belonging to this group of course is Goldman Sachs (GS), which leaped just about 25% since late December.
Given the vertical moves of the above stocks the odds of them moving much higher in the near-term are deteriorating by the minute. As selectivity among stocks with further upside subsides at this stage in the broader market rally, look for an increasing number of stocks resembling the above moves and stay away from them from the long side.
