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Overbought Stock Market Pullback...Finally....

Stock-Markets / Stock Markets 2014 Dec 13, 2014 - 05:09 AM GMT

By: Jack_Steiman


The market was begging for it. Day after day we stayed pretty much at overbought levels on all the major oscillators. The RSI's are sometimes staying well above normal overbought levels of 70. Readings in the lower 80's are not abnormal. You sit and wonder how long it can last. You know it's going to finally sell hard, but figuring out that moment is not an easy chore by any means. We have stayed overbought longer than most would have thought possible, and those who shorted at the first signs of overbought paid a big price as the market kept climbing higher.

We don't know for sure if that time is now, but you should never be totally surprised when it does happen. We have basically been over thirty percent on the bull-bear spread since February. We have spent months of that time over forty percent. Once as high as forty six percent. Recently, we touched forty-two percent again. So yes, this doesn't feel good. It's lousy having to take your medicine after months of severe complacency, but that may be what time it is for the bulls. Try not to get too frustrated by it. It was a nice run. It'll come back again. It always does, and will again not too far in to the future. Hey, in this market you never know. Out of the blue it can reverse but if we go by price behavior here it doesn't look too promising short term so we adapt. It's not the end of the world unless you get cute and try to go against the grain. Most of you I'm sure know not to do that.

Financial and industrial stocks were the leaders lower today. The entire market overall took it on the chin, but the recent leaders, especially the heaviest weighted leaders, fell apart in a big way. That huge breakout on the financial stocks that broke out the market was a total head fake. When markets break down they usually are led by the Nasdaq froth stocks, and they were bad enough today, but seeing these lower P/E stocks break down is a real warning sign. Never great to see high dividend, lower P/E stocks leading lower. It means it's selling across the board with nothing able to hold the market up such as we had been seeing consistently before. A total change of trend.

With commodity stocks still falling hard, and with their weighting also quite heavy, it's easy to understand why we couldn't defend the 50-day exponential moving average on the S&P 500 and Dow today. Even the airline stocks, which were holding up well due to oil prices, put in strong reversals down. Hard to imagine them staying down, but you can't argue with their reversals lower today. More and more sectors losing support than we've seen in quite some time, thus, they're not getting defended as they had been before. More and more erosion big picture this past week, which was very nasty for the markets. Bottom line is too many sectors with very heavily weighted stocks are now losing key support levels, and are, thus, finding fewer and fewer buyers. Not what the bulls want to see.

So now we watch and learn about whether this will be a pullback, correction, or the start of a new bear market. I don't think we see a bear, but a correction is a real possibility. It's impossible to measure how much a market will sell based on long-term massive froth. The S&P 500 lost the 20-day exponential moving average at 2020 along, with the September high at the same level. Big open gap at 2000 is next followed by the 200-day exponential moving average at 1941. Below that it gets very nasty. 2020 is now resistance. A real change of trend to have the 50-day exponential moving average be resistance instead of support. The best thing you can do now is to stay out of harms way until things settle down.

Don't be a hero. The tide is turning. Let's see how the bulls do defending the gap at 2000, and then possible having to deal with 1941. Very slow and easy here.

Have a nice weekend!



Jack Steiman is author of ( ). Former columnist for, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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© 2014

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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