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Relative Strength Indicator: Remains in Danger Zone

Figure 1 is a weekly chart of the SP500. The indicator in the lower panel is a composite that looks at the relative strength of the 9 SP500 sectors: Materials, Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Technology and Utilities.

Figure 1. Relative Strength Indicator
Relative Strength Indicator Chart 1

As can be seen in the graph, all sectors have a high relative strength, which puts the indicator at its highest reading. During this rally, a rising tide has lifted all boats. There is little to suggest imminent danger.

Figure 2 is the same as figure 1, but the indicator in the lower panel is now smoothed with a 39 week exponential moving average. When looking at the data this way, we note that the indicator is very extreme, and such extremes tend to coincide with intermediate market tops.

Figure 2. Relative Strength Indicator
Relative Strength Indicator Chart 2

The bottom line: This indicator goes along with our current thesis that this time won't be different, and that the market rally is very late in the price cycle. At best, the market will be range bound for the next couple of months as it works off the overbought condition. The best thing to happen would be a sell off resulting in bearish investor sentiment, but I doubt investors or the Fed will allow that to happen.

 


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