Much to my surprise and to the surprise of many investors and traders alike, the major averages in October posted eye-popping results. For the month, the Dow Jones Industrial Average (chart) gained 8.7%, the tech-f0cused Nasdaq (chart) gained almost 10%, the S&P 500 (chart) notched an 8.3% gain and the small-cap Russell 2000 (chart) closed the month out up 5.55%. Yes almost double digit gains for the Dow, Nasdaq and the S&P 500. Now wait a minute, I thought the month of October is supposed to be one of the weakest months of the year for equities. I think in large part earnings reporting season has been a pleasant surprise to most investors and a continuing subdued Federal Reserve is responsible for the most recent gains and confidence in stocks. That said, I do think that this latest market run has been a bit too much too fast.
A quick look at the Relative Strength Index of the aforementioned indexes might also confirm my belief. The relative strength index is also referred to as the RSI. This particular indicator is one of the most watched technical indicators by seasoned traders and investors alike. The RSI compares the size of moves of gains and losses in a given period of time to highlight whether a stock or index is overbought or oversold. According to the RSI principles, the 70 value level or greater is considered an overbought condition and the 30 value level or lower is considered oversold. And as you can see with the Dow Jones Industrial Average (chart), the Nasdaq (chart) and the S&P 500 (chart), all three indexes recently hit or breached their respective 70-value line and reversed course on Friday. Now that does not mean that these indices could not break back through the 70 value level and continue onto higher levels and remain overbought for an extended period of time. What I am saying is that historically and from a technical point of view, the relative strength index has been quite reliable when markets overshoot to the up or down side.
We are now in the final two months of the trading year and let’s see how the markets react to this initial pullback we saw on Friday and whether or not this is the beginning of a slight correction to this extraordinary market run we experienced last month.
Good luck to all 🙂