The broad stock market is vulnerable to a short-term decline.
For the first time all year, the McClellan Oscillators are screaming “CAUTION!”
Take a look at these charts…
These are momentum-based indicators that help determine overbought and oversold conditions.
Readings of more than 60 indicate severely overbought conditions and often preceded declines in the markets. Readings of less than -60 express extremely oversold conditions and usually lead to strong bounces in stock prices. Those conditions are heightened whenever the indicators also close to going outside of their Bollinger Bands.
Both of these indicators closed in extremely overbought territory last Friday. And both indicators closed above their upper Bollinger bands.
This is the first time this year that has happened. It’s a reason for traders to be cautious on the broad stock market right now.
Buying Stocks Right Now Is a Bad Idea
Readers should note the oscillators reached “oversold” conditions twice this year – in mid-January and mid-April. Those were good times to buy stocks. The S&P 500 rallied sharply in the weeks that followed.
Right now, though, we have the opposite condition. The broad stock market averages have been strong for several weeks. Bulls have been in charge. Price action has been positive. And the bullish momentum has been unrelenting.
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The action, though, has reached extreme levels. The NYMO and NAMO are in extremely overbought territory for the first time this year.
As we’ve seen many times, it’s rarely a good idea to chase stocks higher into extremely overbought conditions.
Just as it was a poor idea to try to short stocks when the NYMO and NAMO were extremely oversold in January and April, it will likely prove to be a poor idea to buy stocks right now.
These indicators are telling us the market is vulnerable to a short-term pullback. Traders will likely have a better opportunity to buy stocks in the days ahead than they do right now.
Best regards and good trading,
Jeff Clark
Editor, Market Minute