I don’t see any signs of a stock market top right now, but we do have to be on guard if one comes. I want to show you the warning sign I am on the watch for.
First, some people got worried that a top of some sorts was put in after the DOW fell 500 points once the Fed’s FOMC came out two weeks ago, but it takes more than one down day to signal a top and a news event doesn’t really create one either. The reality is the Federal Reserve is not going to raise interest rates anytime soon.
What brings in a top is an extreme overbought situation in the markets. We saw that happen with gold to start this month as its RSI level got right under 80 and so gold pulled back. Now gold is oversold and working towards making a new bottom as the US dollar is overbought.
So I can’t really predict to you when the next important stock market top is coming, but I can tell you that if we get an extreme overbought reading for the market averages in terms of RSI in the coming weeks or months I would think one is being put in and would take action by reducing some of my positions or putting on hedges.
Right now the market is not overbought like that. As you can see from this chart of the S&P 500 it’s last two major peaks came with the RSI near 80, and last year around Labor Day it actually got above that level.
It would take a rally straight up for several weeks to make it happen again.
Daily stochastics are overbought, but when you are in a strong uptrend, like the market has been in since November, that can just lead to a pause in the rally or slight 5% or so dip instead of a major peak.
We’ll just have to see how things play out. Timing markets isn’t so much about predicting the future as just paying close attention to what is happening.
As for this week, I’m still watching gold closely. Here is the 60-minute hourly chart for the GDX gold stock ETF, with the GDX/GLD ratio on the bottom of it.
I need to see the GDX/GLD start to trend up to give us a buy signal.
For now gold is just going sideways in a narrow range, which is typical after a quick decline like we saw two weeks ago.
-Mike
