Wednesday, October 6, 2010

70% of S&P 500 Companies are Overbought

I recently discovered a graph that shows the overbought and oversold percentages of the S&P 500.  It is interesting to see that 70% of these companies are overbought, which is very concerning.  It is also concerning that it looks as if the rally is turning.  Some analysts and financial forecasters such as Mike Turner from Street Authority ( that predict that the recent rally's gain will be erased.  His reasoning is mostly the fact that the rally wasn't based on any good economic news or positive event. 

Now that its October (historically one of the worst months for stocks), 70% S&P components are overbought and the recent rally was based on no significant factor, we could be facing some problems.  It is important to be cautious and if you made money last month, sell it and lock in those gains. 

The Fed is expected to make a few moves by early November.  Whether they will continue quantitative easing, buyback bonds, or change rates is yet to be determined. 

Trade:  A good play for this environment would be Proshares Ultra Short S&P 500 ETF (SDS).  This will be a great addition to provide security for your portfolio.  SDS moves at twice the rate in the opposite direction of the S&P 500.  SDS is currently trading at $28.56.

Disclosure: No position as of this writing, intent to open a position in near future.

Disclaimer: Invest Chief is not held accountable to any loses sustained by stocks recommended. It is always important to do your own research of the stock before you invest. These trades and ideas are the opinions of the crew of Invest Chief. Invest Chief receives absolutely no compensation from companies that are recommended. We are a private organization, dedicated to promoting financial well being and prosperity.

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