For the first time since 2008 the Organization of the Petroleum Exporting Countries (OPEC) agreed to cut output sending oil prices and oil stocks soaring. Oil (see chart below) had one of its best days in years soaring over 10% which helped propel the Dow Jones Industrial Average (chart) and the S&P 500 (chart) to set yet another record high yesterday before a late day sell-off. Nonetheless, stocks have been on fire since Donald Trump won the election. Seemingly every sector other than the gold sector is overbought. All you have to do is look at the financial sector Symbol: XLF (chart), the materials sector Symbol: XLB (chart), the industrials sector Symbol: XLI (chart) and the energy sector Symbol: XLE (chart) to see how overbought this market is. That said, stocks and or indexes can remain overbought or oversold for that matter for extended periods of time. Add into the mix Trump’s pledge to spend over $1 trillion on infrastructure here in the U.S. and the pledge to cut corporate and capital gains taxes and why would anyone think this rally could not continue?
It is easy to get caught up in the current euphoria of this breathtaking rally in the stock market and the promises of the incoming administration. However, let’s not forget what has been promised has to actually occur and if there is any back peddling by the new administration, the markets could react just as aggressively to the downside as they have to the upside. I am not suggesting that this will happen but we have all seen politicians make promises before they are elected only to change their tune after they take their respective seats. Which is why I do my best to tune out the noise and focus on overbought and oversold conditions. And this is where we find ourselves today. A very overbought market that I would expect will revert to the mean at some point in time.
Good luck to all 🙂
~George
