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It’s probably no surprise that a run of nine straight weekly gains — the longest since 2004 — leaves the S&P 500 index in what the technicians call “overbought” territory as the new year gets under way.
As one might expect, that points to the potential for a near-term pause in the S&P 500
SPX
rally, but the message from such strong runs is a pretty positive one for future returns, noted Jeff deGraaf, chairman and head of technical research at Renaissance Macro Research, in a Tuesday note.
Pointing to the chart below, he notes that “such occurrences are usually a confirmation of momentum and continued trend rather than a liability.”
Renaissance Macro Research
What about those overbought conditions? In technical-analyst lingo, an asset that is overbought has become overvalued, perhaps rising too far, too fast. That can be measured by indicators, such as the relative strength index, which measures the speed and change of price movements.
Other measures can also be used by analysts to discern when an asset is overbought or oversold.
Of course, assets can continue to rise after becoming overbought — or fall after becoming overbought or oversold, as illustrated in this post on social-media platform X late last week by Charlie Bilello, chief market strategist at Creative Planning.
In the case of the S&P 500, there’s “no doubt” the large-cap benchmark is tactically overbought, deGraaf wrote, noting that 10-day advancers are in the mid-60% region, inflows into S&P 500-tracking exchange-traded funds have become “excessive” and the performance of high versus low beta stocks is in the 98th percentile. High beta stocks tend to be more volatile than the overall market, while low beta stocks are less volatile.
“All of that suggests the potential for a pause, but it should be used opportunistically to build long positions in new relative strength high names and industries,” he wrote.
The S&P 500 rose 24.4% in 2023, ending the year just 0.6% shy of its record close of 4,796.56 set on Jan. 3, 2022. The Dow Jones Industrial Average
DJIA
also logged nine straight weekly gains, its longest such run since 2019, as it ended 13.7% higher for 2023.
See: Here are five things that could interrupt the U.S. stock-market rally in early 2024
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