9 Minute Read

Tackle Today: The Market is Overbought

February 8, 2024

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«What Does That Signify?»

Coach Mark here.

It has been quite a ramp in the market over the last three months. When you are up (assuming the market does not give it back in the next two days) 14 out of 15 weeks then that is going to lead to some “overbought” conditions in the market according to indicators like RSI. But what does that mean?

Overbought is an interesting term that has inherent bearish connotations. Investopedia in fact has the definition of an overbought stock as “One that is overvalued, which means the outlook is bearish as there will be a pullback on the stock soon.” Like I said, the term is used in a very bearish sense in the investing world.

But does overbought = bearish. Hardly. In fact, when you go back through history you will see that some of the most powerful trends in the market continued despite entering overbought territory. Rarely in the market does 1 + 1 = 2. In overbought conditions, you not only have momentum but you at times have powerful narratives and fundamentals driving price leading to these overbought conditions. In my Hard 14 class last night I went over overbought conditions over the last 100 years on the S&P 500 and there were far more bullish outcomes in these conditions than bearish ones.

Still, overbought conditions can be tricky. It is why it is important to pay attention to technicals and the macro backdrop as these overbought conditions play out. History says it might not be the best time to buy out-of-the-money call options but it is not as simple as overbought = overvalued.

Have a fantastic Thursday!



Chart of the Day: S&P 500 Weekly Chart

The weekly chart on the S&P 500 has been one to behold and led to some overbought conditions to start manifesting themselves.


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