War Moves Market into Overbought Condition
By Joseph W. Sunderman ([email protected])
3/21/2003 3:32 PM ET
The cloud of uncertainty that blanketed the market for the past few months is finally clearing. Recently, the talk of war kept pressure on equities while buoying bonds, gold, and energy prices. The 48-hour warning by President Bush plus the beginning of the Operation Iraqi Freedom has changed the landscape of the "major" investment classes ( What a Couple of Weeks!).
As seen by the graphic below, the S&P 500 Index (SPX) has rallied more than 100 points with gains of 13.3 percent since its lows on March 12. Due to this price action, the nine-week Relative Strength Index (RSI) has gone from 37 to 56 in a matter of a week. This kind of a move is significant given the historical context.
This kind of RSI move has only happened eight previous occasions since 1970. Four occurrences took place in both the 1970s and 1980s. On the eight occasions, the SPX rallied an average of 1.65 percent after four weeks with six out of eight being "winners."
Thus, we're at crunch time on this indicator. For the past eight years when the SPX has seen its RSI rally to its top regression channel, the market was in an overbought condition and ready to roll over. On the other hand, 30 years of RSI history shows that such an RSI move is a sign of significant strength that fading the uptrend may be hazardous to one's portfolio. As a trader, I would hold off making massive bearish or bullish bets unless there is a news event that signals a change in the war with Iraq.
"The point at which a competitor is pursuing the best possible strategy, given the strategies of the other participants" - John F. Nash
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