Have you been paying attention to the VIX lately? The index, often referred to as the “investor fear gauge” has reached a historical low. In most cases, a low VIX reading often means a decline is imminent. Couple the historically low reading with all of the major indices in a “very overbought” state and I think the bears could rear their ugly heads in the near future. I am starting to see some extremes that I have not seen in years so needless to say I think a sustained move to the upside will be limited. Seasonal tendencies and historical precedents have been virtually worthless lately so I am interested to see if the trading days surrounding Turkey Day will be kind to the bulls like in the past. Either way, as I said before, any move to the upside should be limited.
Also, just a little more food for thought. Have you forgetten about the upside gap that occurred on 8/16 in the S&P? Over the history of the S&P, almost every gap is eventually closed. I know this sounds like a stretch given how far the market has come, but Mr. Market is full of surpises and loves to catch investors off guard, especially after a nice bull run when emotions and greed are running high. The herd mentality scares me, but I digress. I am in no way saying the gap will close, but it is certainly something to consider if the market happens to take a turn for the worse. Remember, paper profits are worthless. It never hurts to take a little off the table to lock in some of those hard earned returns.
RSI (5) Wilder for November 16, 2006
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SPY - 83.4 (very overbought)
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DIA - 85.1 (very overbought)
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IWM - 81.3 (very overbought)
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QQQQ - 87.3 (very overbought)
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Andrew Crowder, Chief Investment Strategist,
www.crowderinvestments.com