Market has been going up for a while now in a trend channel. It looks like stock indexes may eventually reach all time high. But how far can it go? Is it a good time to invest? Or should we be waiting this one out on the sidelines?
Anyone who enjoys eating fruit knows there’s a fine line between ripe and over-ripe.
If it sits in the fruit bowl too long, over-ripe turns rotten.
As experienced investors know, the stock market goes through similar phases. An overbought, or over-ripe, market can spoil quickly. And markets fall faster than they rise, thus it is easy to get caught in a quick slide that wipes out profits, or brings losses, sometimes huge.
Take a look at this chart for example (wave labels removed), and ask yourself, is the stock market on the verge of spoiling?
The Aug. 10 Financial Forecast Short Term Update provides commentary to go with the chart.
[An] indicator that has moved to an overbought condition is 10-day NYSE Trin (advance/decline ratio divided by the up/down volume ratio). Wednesday’s close [Aug. 8] was .937, which was the most overbought level since March 26, when 10-day Trin closed at .900 (see gray vertical line). That was five days prior to the April 2 S&P top. It’s certainly possible that Trin becomes even more overbought prior to a market high, but it doesn’t have to. Current levels are the exact opposite of those that attended the August, October and November 2011 lows, as marked on the left side of the chart.
EWI also looks at several other internal measures.
A healthy bull market sports broad participation among different sectors and indexes. Up days are consistently accompanied by high volume; momentum is strong.
The indicators EWI watches suggest this market is indeed overbought and still ripening.
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