As the S&P 500 becomes approaching overbought based on our proprietary counter trend indicator we will now wait for an overbought level. 10 out of the 13 last approaching overbought levels have proceeded to our overbought level. Of course there is no guarantee the S&P 500 will become overbought.
If we reach our proprietary overbought level, we will look for a slight reversion to the shorter term mean in this longer term bull run. We believe 2014 will be a stock pickers market as the Fed reduces liquidity. This will cause more divergence between stocks within their respected groups. So, we want to look for the Strongest Stocks within the S&P 500. Below are currently the Strongest 20 Stocks within the S&P 500 based on our proprietary rating system.
For those who are not familiar with our proprietary ratings, our models are derived from statistical price series. We rate the strength of each securities strength independently and use a counter trend system to determine overbought level. We have only had one overbought reading on the S&P 500 since our Strong Buy reading at 1,413.
Currently our counter trend reading that determines overbought levels is a -65. To give you some insight into this reading, we compiled the last 18 most overbought markets since 1995.
As you can see, you will get some mean reversion, but the pull backs are shallow as the stronger the market behavior, the crowd is forced to buy the dips. As you can see May 22 of 2013 was the third most overbought S&P 500 in the last 18 years.
Dec 15, 1995 Counter Trend was -90.97
Aug 5 1997 Counter trend was -74.19
Jan 16 2004 was -72.28
Feb 14 2007 counter trend was -69.03
Jan 14 2010 counter tend was -74.52
Feb 2 2011 counter trend was -72.53
May 22 counter trend was -74.08
Current counter trend -65.
Here is how the S&P 500 performed 30 days following these readings.
Dec 15, 1995 -3.13%
Aug 5 1997 -2.20%
Jan 16 2004 +1.00
Feb 14 2007 counter trend was -3.15%
Jan 14 2010 counter tend was -5.63%
Feb 2 2011 counter trend was -2.63%
May 22 counter trend was -74.08 +1.4%
Above are the Strongest 20 S&P 500 names. Many of these names are overbought at this juncture and we would be buyers of these names of a broad S&P 500 pullback. Please note a 5 rating is a Strong Buy and a 4 is a Buy. The average duration of the length of time held at a Strong Buy is about 260 days. One theme that has remained constant for the last 20 months has been the domination of the services sector having the strongest names within the S&P 500.
Below FedEx – FDX, which is one example of the Strongest 20 Stocks that is now overbought. Even though seasonality and complacency could push this market higher into year end, you will notice how stocks are overbought defering to the FDX Chart below.