Wednesday, September 16, 2009

Never Have So Many Stocks Been So Stretched Above Their 200ma.

Near the end of August I discussed that some of the breadth measures tracked by Worden were near all-time highs. This situation corrected itself as the market embarked on a brief selloff. Tonight two of their indicators actually registered their highest readings ever. These are T2109 and T21111 which track the number of stocks 1 and 2 standard deviations above their 200-day moving averages. Below is a long-term chart of T21111 with full history of the indicator going back to 1986.

I marked on the chart the 4 other instances that came close to the current reading. What you may notice is that these spikes were generally brief. Every case was followed by at least a mild selloff that worked off the severely overbought conditions. In no case did the extreme spike mark the end to the bull market that created it. It’s dangerous to read too much into only 4 instances, but a short-term pullback does seem reasonable. The current reading does not suggest a long-term top, though.


Toptick said...

Good stuff as always.

This points out one of the problems of mean-reversion-based systems: usually, "overbought" or "oversold" measures indicate that prices will revert, but sometimes over bought/sold conditions are part of a powerful move, and much more is to come. (Lots of indicators showed heavily overbought in March and April.)

Have you written or thought about distinguishing overbought/sold as a prelude to reversion versus as part of a larger trend?


market folly said...

Interesting data indeed. Thanks for all your work in this regard, enjoy reading your stuff. Very prudent that you point out each spike did not end the bull market run but rather signaled a sell-off.

So many people are anticipating a sell-off (myself included) and you see a lot of people talking about a cautionary stance. However, maybe this is one of those scenarios where everyone just talks about it and it never happens. Crazy market indeed.


Damien said...


May I have permission to repost this article with an author credit to you and link back to this post? If so, it will go in The Trade section on our homepage tomorrow.


Damien Hoffman
Wall St. Cheat Sheet

Rob Hanna said...

Sure. Thanks.

Market Folly,
Thank you.

Interesting question. The group of indicators that often seems to do the best at signalling "overbought with more to come" are breadth-based. Price-based indicators generally do a poor job of distinguishing whether it part of a bigger move.

Toptick said...

Breadth makes sense. Good thinking! Thx.