It's Overbought, But Don't Sell Yet

Focus: MARKETS

Dan Sullivan Image Dan Sullivan Editor, The Chartist

While the markets may appear to be extended a bit more than investors would like, there are plenty of indicators pointing the way to further gains, writes Dan Sullivan of The Chartist.

Many analysts contend that stocks are overbought as well as overextended. However, overbought markets can and often do become more overbought, which is exactly what has occurred over the last several trading sessions.

Our Overbought/Oversold indicator registered a heavily overbought +3.53 on January 2. Since that time, stocks have worked their way persistently higher, with the Dow Transportation Average (up 7.71%) leading the way, recording bull market highs and all-time highs as well.

The Dow Industrials confirmed the breakout of the Transportation Average on January 18, when it managed to close above its prior bull-market highs set back on October 5. This triggered a Dow Theory buy signal.

This is a powerful bull market—make no mistake about it. The year certainly got off to a good start with the Chartist Volume Thrust indicator flashing a strong buy signal on January 2. On December 31, upside volume overwhelmed downside volume by 27.95:1, and did so again on January 2 by 11.55:1. Since 1958, there have been only 14 prior volume thrust buy signals.

Many analysts feel that the giant pension and insurance funds are overweighted in bonds. It is only a matter of time before they begin to rebalance.

The public also appears to be coming back, since US equity funds took in $11.3 billion in the first two weeks, which was the largest two-week inflow in a decade.