Officially Overbought… Again
The following blurb appeared in yesterday’s Opening Look piece.
The Recent RSI Negative Divergence
First, let’s re-visit the negative momentum divergence that appeared two weeks ago. It did not play out like it did in February. That’s easy to see, but important to note. We cited it given what happened the last time, but also mentioned that in the strongest markets, potential warning signs sometimes can end up being just pauses in a bigger trend. That clearly ended up being the case this time again…
First Overbought Readings in at Least Two Weeks
As of last Friday, the SPX’s 14-day RSI now is above 70 again for the first time since Monday, 5/19. A quick 3.3% decline soon followed, which, of course, was eagerly bought.
Here’s a chart showing when the index’s RSI hit overbought territory for the first time in over two weeks since the October’22 lows. Some happened in the middle of strong runs, others near key inflection points. Let’s now look at major breakouts combined with the RSI from last few years…
Overbought while breaking out to New Highs
Here are the major breakout zones from 2019, 2020, and 2024. A few key similarities stand out. In each case, the SPX snapped back from intense volatility and logged massive gains before returning to its prior highs.
Those surges produced overbought conditions, which the index had to digest—highlighted in yellow. These consolidation periods may look tame in hindsight, but they felt anything but in real time. The late 2023 / early 2024 pause was the outlier, which was brief and shallow compared to the others.
Currently, after a nearly 30% rally in under three months, another pause could be on deck. But the key takeaway is this: each of those mini-volatility phases was ultimately followed by months of continued upside.
New 52-Week Highs
As stated above, the SPX’s 41 stocks making new highs on Friday was the most since 50 on 3/4/25. Compared to the last five years, though, this still is a low number. That’s not bearish though: the number of new highs is almost always a lagging indicator during major comebacks – that’s if said comebacks are led by large cap growth, which has been the case again this time.
One Hundred New 52-Week Highs
In fact, over the last two years, by the time more stocks have caught up and pushed this number to over 100 new highs, it led to consolidation and/or corrections each time – as highlighted in yellow.
The (positive) caveat is that after the SPX first had 100 stocks new 52-week highs in December’23, it led to another 14 months of uptrending price action. So… we want to see more stocks make new highs for the long-term trend to gain support, but when that happens, it could suggest a short-term stretched condition. We’ll be watching it closely.
Bollinger Bands
The SPX finished above its upper Bollinger band on Friday, producing an extreme 1.1 %B reading. Here are all of the highest %B levels since late 2023. Not surprisingly, most of the time, a pause resulted.
But not every time – from the low in October 2023 through February’24, the index continued higher despite two of them being triggered along the way.
This morning, we sent Professional clients the monthly Roadmap report for July and Q3.
In the Roadmap piece, the analysis is focused on the longer-term charts, trends and stats. It’s both a performance review of the most recent period and a chart and study preview of the next period.
This is extremely helpful given that it reveals longer term themes that sometimes are missed in the daily work. We profile long-term breadth, worthwhile studies, side-by-side performance tables vs. prior periods and selective long-term charts for the major indices, ETFs and individual stocks.