Momentum being overbought does not necessarily mean Stocks are vulnerable

Equity trends show no evidence of wavering.  Despite this week’s mild consolidation in Equity indices, the Cyclicals have managed to kick into gear to provide support to Equities and little evidence of any trend break has occurred in uptrends of QQQ nor SPX.  Technically speaking, this week’s mild consolidation should represent a buying opportunity for a push higher into mid-March before any consolidation sets in.  Importantly, both the Equal-weighted S&P 500 ETF (RSP 0.10% ) as well as the NASDAQ Composite have just logged new all-time high monthly closes as of the end of trading today, 2/29/24.  SPX requires a break of last week’s lows (SPX-4946) to have even minor concern about additional weakness.

Equity markets remain in a sweet-spot right now as February has come to a close having shown no real evidence of weakness that traditionally is possible in Februarys of Election years. 

Trends remain upward sloping on short and longer-term timeframes.  Momentum is positively sloped and, while overbought on daily and monthly basis, has not really begun to diverge meaningfully.   Technically strong sectors like Technology have been joined by strength in Healthcare, Industrials and Financials, while this week’s above-average gains have been seen in other sectors like Consumer Discretionary and Materials. 

While I’m on the lookout for evidence of DeMark based exhaustion and/or sector deterioration that might prove problematic, at present, we’re seeing the opposite, and the cyclical weakness possibility for mid-February has come and gone and SPX, QQQ and DJIA are all now pushing back higher along with cryptocurrencies.   

While the US Dollar and US Treasury yields have largely moved sideways over the past few weeks, this has not proven detrimental to the US Equity market. I suspect that a rally might be possible for both the US Dollar and Yields sometime in March which could take these both back to new monthly highs, despite a lack of Treasury supply until 3/11/24.

SPX technically should begin a push back higher to exceed 5111 into the month of March.  I’ll discuss upside targets in price and time next week, but another 2-3 weeks of gains look quite possible despite many market participants feeling SPX has grown elevated.

Below is a weekly chart of the Equal-weighted S&P 500.   This ETF (RSP 0.10% ) as well as NASDAQ Composite, have officially made new monthly all-time high closes as of the end of trading Thursday, 2/29/24.  Furthermore, as of Friday’s close, 3/1, they could both make new all-time high weekly closes if they remain above 162.75, 16057, respectively.  

Thus, while QQQ, SPX and DJIA have been pushing higher following their move to all-time highs, we now have the NASDAQ and the Equal-weighted S&P 500 joining suit, which are two important indices to keep in mind.

Equal-weighted S&P 500 Index

RSI has gotten overbought;  Does this mean Equities are vulnerable?  That doesn’t seem to be the case

Investors who have missed the recent US Equity rally have typically come up with reasons to justify why overweighting Equities might seem incorrect in this environment, and one of the top technical reasons concerns momentum being overbought.

However, it’s important to qualify this saying, as overbought territory is different between daily charts, weekly, and then monthly.  Some with shorter-term timeframes claim markets are overbought merely when daily momentum indicators like RSI see 14-day averages climb above 70.   Others who are longer-term focused tend to concentrate on weekly and/or monthly RSI, which have their own positives and negatives to consider.

Initially, when focusing on RSI on daily charts alone, and honing in on the key 70 level (which is widely used to suggest momentum has gotten overbought) we see that results are nearly opposite what many non-technical investors might suspect.

Over a three, six, and 12 month basis, the table below shows that when SPX constituents have climbed over 70%, gains have largely mirrored the percentages when RSI is under 70.  Thus, being overbought in and of itself, does not seem to be a hurdle towards further gains.

Weekly data also suggests that selling overbought conditions might be a poor decision as well as selling near-term weakness

I compiled a table with the help of Fundstrat’s own “Tireless Ken” which shows the results of Relative Strength index (RSI) being above 70 along with the act of crossing above 70 from below and also crossing below 70 from above.  (CURRENT RSI level as of 2/29/24 is 75.5 for SPX.)  The key takeaways are as follows:

• Being above 70 on weekly RSI proved to be a better gauge for forward returns for SPX than when it was below.

• The act of crossing above RSI 70 level after being below for at least 25 weeks generally produces performance that is not as good on a 13-week projected forward return.  However, the 26-week and 52-week return data generally is better.

• Crosses below 70 in weekly RSI generally have shown to be not statistically significant from all occasions when not using RSI data but are generally better on a 26-week basis than average SPX data going back since 1929. 

• What’s fascinating, is that the act of crossing below 70 on weekly RSI for SPX after having been above for at least 10 weeks (has happened 19 occasions since 1929) has actually shown dramatically much better returns on a 26 and 52-week basis.

I’ll discuss in future reports what happens when weekly and also monthly RSI decline under 50 and 30, which, as you might expect, lead to worse results.

AMD breakout looks right to follow, in the short run

Today’s rally in AMD 1.03%  is very good for this stock technically as it’s officially exceeded the highs of a consolidation that’s been ongoing since mid-January. Volume is expanding on this move to the highest of the last week and Daily DeMark readings are premature by 3 days while weekly is 1 week away from signaling possible exhaustion. 

Thus, while I feel AMD likely can lift to 200-205, I feel like this might prove important on a rise into mid-March as resistance.  This entire consolidation is normally viewed as a “wave 4” pattern from an Elliott-wave perspective.  Moreover, today kicked off the 5th wave potentially from last October. 

While near-term bullish, this would likely be something that will cause momentum to begin to diverge negatively and “could” represent a profit-taking opportunity when this reaches 205.  At present, Thursday’s gains are quite bullish technically and the pattern breakout is something one could use to add to new trading longs, and is not viewed as something to take profits into right away given the potential for upside acceleration in the near-term.

Advanced Micro Devices Equity