As we all know the market has been advancing (almost uncontrollably) for several weeks now. I can’t remember the last time the Dow (DIA) has been in a “very overbought” state for this long. I went back over the last ten years and there has only been a few months during that timeframe where the Dow has had an overbought reading this high. In each instance a decent correction was in the cards several months later. It certainly looks like the set-up for the mid-term election statistic that I mentioned repeatedly last week is coming to fruition.
For those of you who are new to the blog (there seems to be a recent surge of readers on a daily basis) I stated: “Another interesting (and not often mentioned) statistic that I came across was that when the market had a strong September and October during the mid-term elections (4 year cycle) every single time the market experienced a dramatic sell-off during the middle of November. The scary thing was that the sell-off averaged 5% to 10%. This is certainly something that we will be watching as we move closer to the mid-term elections.” I like to point this out to people so at least they are aware of the potential of a correction. I encourage those of you who are new to the blog to go back and read the commentary from last week to get a better perspective of our short to intermediate-term outlook.
The week of Options Expiration is often positive, although the “Tuesday Top” can often come into play which signals the high of the week. The only historically negative day during the week is the day of Options expiration. However, as we enter post options expiration the week swings over to the bears where only the Wednesday of post-expiration is historically bullish. Obviously, these are only seasonal measures, but it is always advantageous to be aware of the seasonal tendencies that lie ahead.
RSI Wilder (5) for October 16, 2006
- SPY - 88.7 (very overbought)
- DIA - 92.0 (very overbought)
- IWM - 85.3 (very overbought)
- QQQQ - 86.3 (very overbought)
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Andrew Crowder, Chief Investment Strategist, Crowder Investment Research, LLC