Look, we’re not much on technical analysis. Generally speaking, we like to believe that the lines you see on your screen in some way, shape, or form approximate fundamentals and you’ll have to pry our contention that technical analysis is the market equivalent of palm reading from our cold dead … palms.
But here’s the thing: people like charts and people also like doom porn. And because we haven’t, historically speaking, been completely averse to “trafficking” in questionable “goods”, we don’t mind throwing out the scariest charts imaginable from time to time if that’s what readers want. It’s supply and demand, you know.
Given that, we’re going to go ahead and present the following color and visual excerpted from a recent blog post by John Murphy.
Suffice to say it doesn’t bode particularly well in terms of suggesting that it’s even possible for stocks to rally any further from here, although as you’ll read below, John probably didn’t write this with the express intent of alarming anyone…
Via John Murphy
Global stock markets started off the new year with a bang. U.S. stock indexes exploded to record highs for the best start in years. Foreign stock benchmarks did the same, including the FTSE All World Stock Index which also hit a new record. New records were set in North America, Europe, and Asia and in both developed and emerging markets. So what’s there not to like? Well, there is one thing. Stocks are very stretched on a historical level. That may not be a problem at the moment. But could become one later in the year if some things start to go wrong. But first let’s look at how much stocks are stretched. The black bars in Chart 1 compare monthly bars for the S&P 500 to a 14-month RSI line. Readings over 70 show a major overbought condition. The last two times that happened was in the 2006/2007 period and in 2014 (circles). The earlier condition led to a major downturn in 2008. The later version led to a downside correction in 2015 in excess of 10%. What really jumps out in Chart 1, however, is that the monthly RSI reading of 86 is higher than both of those two prior peaks. In fact, it’s now at the highest level since the late 1990s. That puts the S&P 500 at the most overbought level in twenty years. That’s not necessarily a bad thing over the short run. But it is a caution sign that things may have gotten a little too good. The 14-week RSI line has now risen to the highest level since 1958. That’s sixty years ago. That makes me a little nervous that 2018 may not end as well as it started.
