The Stock Market is Overbought and at a Resistance Point

Oh what a difference a week makes.  It hasn't been many days since we were reading prominent hedge fund managers' warnings that the end of the world "could" be very soon, as they suggested that everyone use maximum risk prevention, and analysts were downgrading their estimates right and left, since they were so embarrassed that their favorite stocks had been crushed in the recent correction.  Furthermore, economists were painting a somber picture by downgrading GDP expectations for the 3rd quarter, and of course, the consumer "expectations" had been doused.  So...that was yesterday; this is today.

It never seems to change.  That is why we let history tell us about the future, and history tells us that when you have monetary liquidity, pessimism, and stocks as cheap as you have now, then you better be headed for growth in your portfolio, not the anti-growth defensive side of the equation.

Today, we have a stock market that has hit its first real resistance point.  If we keep that correction from last year in our peripheral vision, you also see that similar action would call for the "last" pull-back before the big move that should follow.  Of course, we can't forget that in 2010 this corresponding juncture was in August, and now we are about to enter November.  Nothing always occurs as it has in the past, but there is a very rich tradition that predicts very strong 4th quarters, especially after weak 3rd quarters.

And as our title indicates, another parameter that has to be considered is the short-term overbought nature of the stock market.  This is not all-encompassing in its importance, since strong bull markets can carry for months while in an overbought condition, but since we do have that resistance point and the rhyme from last year to consider, we must continue to closely watch the actions of the market over the next few weeks.

Don Hays

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