Indicators Show Market is Dangerously Overbought



The hype may have been all about earnings, but the action (or lack of same) was all about more surprises from the SEC.

On the earnings front: United Technologies ( UTX ) jumped 3.7% after reporting a 20% gain in earnings and beat estimates by 3 cents. Apple ( AAPL ) rocketed 6% higher following Tuesday's after-the-close earnings of $3.33 against an expected $2.54. Boeing ( BA ) and Lockheed Martin ( LMT ) both closed higher on better-than-expected earnings.

But all was not well in the health care sector despite earnings gains by some key stocks. Stryker ( SYK ), St. Jude Medical ( STJ ), Abbott Laboratories ( ABT ) and Gilead Sciences ( GILD ) all reported better earnings, and ABT and GILD beat estimates. However, the sector closed with a 1.8% loss.

Goldman Sachs ( GS ) fell again despite a report from CNBC that the SEC has testimony that refutes the fraud charges levied against the firm. The Dow's financial components fell on concerns that the SEC investigation could expand to include other firms.

At the close, the Dow Jones Industrial Average ( DJI ) rose 8 points to 11,125, the S&P 500 ( SPX ) fell a point to 1,206, and the Nasdaq ( NASD ) added 4 points to close at 2,506.

The NYSE traded 1.2 billion shares with advancers over decliners by 5-to-4, and the Nasdaq crossed 740 million shares with advancers ahead by 7-to-6.

What the Markets Are Saying

As our readers know, I have been mildly bullish for months, but my optimism is now being pushed to its limit by the myriad of "extremely overbought" signals coming from the sentiment indicators. 

Just before writing this report, I was scanning the recent Advisors Sentiment numbers from the respected weekly service, Investors Intelligence ( II ). II is generally conservative, waiting until their indicators are very much in one direction or the other before registering a change in direction. Yesterday, they warned that their advisory sentiment index is very bullish -- a strong negative. The index should be viewed as a "contra-indicator," which means that very bullish is bad and very bearish is good.

They said that even though prices could move higher, a reading of 53.3% bullish reaches a danger level. The last reading this high was at the end of the first week of January at 53.4%, and that led to a 9% correction in the market. And I would add that many stocks, especially some of those that had made the biggest moves late last year, were hit by double-digit declines.

S&P's Mark Arbeter (who has been bearish for the past six weeks) may have jumped the gun, but he correctly points out that the gains made since late February have generally averaged less than 1% per day for the major indices. These gains, which have taken weeks to achieve, could be wiped out in just a day or two of heavy selling.

Mark confirms that virtually all of his indicators are now "extremely overbought," and points to the CBOE equity-only put/call ratio, which in the past 12 days is the "most overbought" in 10 years.

I could go on to list the many sentiment and internal indicators that I follow that are in the dangerously overbought area, but I'll spare you the repetitious detail. However, there is one "seat-of-the-pants" indicator that comes from my many years of watching markets, that is almost always predictive, and that is the contra behavior of the markets to news.

As long as the market acts in the direction of the news, whether good or bad, the threat of a reversal is small. But when markets ignore good news and either go down or sideways, watch out. During the last few days, as we approach the peak of the Q1 earnings season, earnings from the best and biggest companies have been spectacular and the market's reaction has been lukewarm. And yesterday, we saw the same pattern with Apple, Boeing, UTX and Lockheed Martin all knocking the cover off of the earnings melon with the markets barely holding on to a gain.

So watch out. If the market can't make new highs when companies are reporting the most impressive earning gains in years, then buyers have already discounted those gains. The stock market is now very vulnerable to any unexpected bad news. And when the bad news hits, it will hurt.

Today's Trading Landscape

Earnings to be reported before the opening include: Air Products, Alaska Air, Alexion Pharmaceuticals, American Greetings, AmerisourceBergen, Applied Industrial, Arbitron, AutoNation, Baxter, BB&T Corp., Blackstone, Briggs & Stratton, Cabot Microelectronics, Cash America, Celestica, Continental Airlines, Cooper Industries, Cypress Semiconductor, Danaher, Deluxe, Diamond Offshore, Ensco, Fifth Third, GATX, Gentex, Goodrich, Hershey Foods, Hubbell, InSteel Industries, Invacare, ITT Educational, JAKKS Pacific, Janus Capital, Kensey Nash, Kimberly-Clark, KVH Industries, L.B. Foster Co, L-3 Communications, Life Time Fitness, LSI Industries, Marriott, McClatchy, MKS Instruments, New York Times Co., Nokia, Nucor, Old Republic, Peabody Energy, Penn National Gaming, PepsiCo, Philip Morris International, PNC Financial Services Group, Pool Corp., ProLogis, Provident Financial, Raytheon, Reliance Steel, Rimage, Sherwin-Williams, Sigma-Aldrich, Sonoco Products, Southwest Airlines, Sterling Bancshares, Sybase, TCF Financial, Tennant, Textron, The Inventure Group, TradeStation, Ultratech, Umpqua Holdings, Union Pacific, USA Truck, Verizon, Watsco, Webster Financial, Wesco, WNS and Zimmer Holdings.

Earnings to be reported after the close include: Acacia Research, Advanced Energy, Align Technology,, Amdocs, American Express, AmSurg, Arthur J. Gallagher, Avid Technology, BancorpSouth, BJ's Restaurants, Bucyrus, Builders FirstSource, C.R. Bard, Capital One, Cepheid, Cheesecake Factory, Chubb, CoBiz, Columbia Sportswear, Computer Programs & Systems, Cybex, Cymer, Cypress Sharpridge Investments, Cytec, Deckers Outdoor, Developers Diversified Realty, DeVry, Digi International, Eastman Chemical, Education Realty Trust, EZCORP, Federated Investors, First Financial, Hawaiian Holdings, Healthways, Hittite Microwave, Informatica, Interactive Brokers, International Game Technology, J&J Snack Foods, Lattice Semiconductor,, Matthews, Micrel, Microsemi, Microsoft, NCR Corp., OSI Pharmaceutical, PC-Tel, PMC-Sierra, Premiere Global Services, Rambus, Riverbed Technology, Rocky Brands, RSC Holdings, STMicroelectronics, SVB Financial Group, Synaptics, Taubman Centers, Western Digital, Wipro and Woodward Governor.

Economic reports due: producer price index (the consensus expects 0.4% and 0.1% ex-food and energy), jobless claims (the consensus expects 460,000), existing home sales (the consensus expects 5.25 million), FHFA House Price Index, EIA natural gas report, Fed balance sheet and money supply.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Stocks

Sam Collins

Sam Collins

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