Teeka Tiwari

Warning: 3 Sectors That Are Dangerously Overbought

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Every fund manager in the world right now is clamoring to get into the stock market for fear that the indexes will continue going higher without them. This "buy with abandon" approach is deemed necessary because they are always at risk of investors redeploying their funds to a better performing manager.

It's this type of buying that results in sectors becoming dangerously overbought.

Buying can get overdone the same way selling can get overdone. Even in a raging bull market, we will see frequent sharp pullbacks. So we don't need to debate if a new bull market is upon us or not. Maybe it is, and maybe it isn't. But what we do know is that nothing goes straight up.

Everything fluctuates between the twin forces of greed and fear. We see these two forces play out in the form of rallies and sell-offs. Right now, the markets are in full-bore bull mode, but we know from our study of markets that this condition doesn't last forever. Through indicators that we use at Sector Hunter we can determine when a sector has the highest probability of bottoming and topping.

In February and March of this year, many bottoming signals were triggered, and the resulting trades that came from those signals have proven to be very profitable. But we are in a different market now; the next major series of moves that the system is looking for are on the downside, not the upside.

As such, the system has flagged several sectors that are exhibiting extremely overbought levels that could prove to be excellent shorting candidates.

But let me be clear: These sectors have not reversed to a bearish condition yet.

There is an important Wall Street aphorism that says "overbought (or oversold) doesn't mean over." Sectors can stay overbought or oversold for extended periods of time.