Stocks took off out of the gate this morning on the heels of a better than expected jobs report. The headline unemployment number fell to 8.3%, its lowest level in three years. This propelled the major averages to multi-year highs. So far this year, the Dow Jones Industrial Average (chart) is up over 5%, the Nasdaq (chart) is up a whopping 11.54%, the S&P 500 (chart) +6.94% and the small cap index Russell 2000 (chart) is up an astonishing 12.17%. This is no typo and yes, these gains have occurred in a little over a month’s time.
Let’s look at the technical perspective of the markets and see if this current bull run will continue uninterrupted. In one of my January posts I referred to a technical indicator call the Relative Strength Index or the RSI. This indicator tracks oversold and overbought conditions and is used by a variety of market technicians as part of their analysis when evaluating current market conditions. As of the market close, all of the key indices and in particular, the Nasdaq (chart) are now in overbought territory with the Nasdaq (chart) on the cusp of the 80 value level – a level not see in over a year.
So what does all of this mean? Well, markets or stocks can be overbought and remain overbought for extended periods of time. However, historically when RSI levels are as elevated as they are today, especially with the indexes, be very careful about jumping on this bull freight train. I would expect a pullback, which actually would be very healthy for the markets, then hold at support levels and continue its uptrend. I am not suggesting that any of this will occur, I am merely pointing out that it would be prudent to allow the markets to take a breather before considering any additional long strategies.
Have a great weekend 🙂