Sam Collins

'Good Overbought' or 'Bad Overbought'?

by Sam Collins   09/22/09

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And we may not see much volume on either side until the Fed adjourns its two-day meeting on Wednesday, with the usual preliminary statement about economic conditions. Hardly anyone is expecting a rate increase, but there may be a statement regarding home sales and the availability of mortgage money. So look for opportunities in the mortgage REITs and homebuilders.

There has been much chatter about the unlikelihood of a further advance because the indices are now about 20% above their 200-day moving averages. This is the first time since May 1983 that the S&P 500 has hit that mark, and only the 10th time in more than 80 years, as noted by Bespoke Investment Group. But the record is a bit cloudy as to what that means. Is it "good overbought" meaning that momentum will probably carry prices higher, or "bad overbought" meaning too much too soon?

I drew a horizontal time line from yesterday's close to intersect with Oct. 6, 2008, in the midst of the bear market fall, and found that the S&P was at 1,098 and the 200-day at 1,325 for a negative difference between the two of more than 17%. Eventually that spread got to negative 39% on Nov. 21. 

Question: On the way back up, is it reasonable to assume that the positive spread could go higher, too, with a further increase in momentum? 

My thinking is that we've not yet hit the place where we should be concerned about a major correction -- this is just a pause. Momentum will likely lead to higher prices and an expansion of the price to the 200-day moving average difference.

The recent bear market was the worst since the Great Depression, and the "spring-back" will probably have more punch. My goal for the S&P 500 is still 1,245 by the end of Q1 2010.

Today's Trading Landscape

Earnings to be reported: AAR Corp (AIR), CarMax (KMX), Carnival Corp. (CCL), Christopher & Banks (CBK), ConAgra Foods (CAG), FactSet Research Systems (FDS) and HB Fuller Co. (FUL).

Economic reports due: ICSC/Goldman Sachs chain store sales, Redbook, Richmond Fed survey, API oil industry report and ABC/Washington Post consumer confidence index.

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