Short-term Outlook (1-5 Days):  Neutral (from 9/28 at 113.85)

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Equity Indicators - Updates and Extremes

NYSE Up Issues Ratio

One of the (supposed) truisms of the market is that when it holds up despite being overbought, then it's most likely going to continue holding up.  Same goes for the opposite - when an oversold market declines instead of bounces, then it's probably going to keep going down.

We're seeing a test of that theory now.  Two weeks ago, we saw some extreme overbought conditions, defined by the 10-day average of the Up Issues Ratio on the NYSE.  It poked above 60%, which historically is extremely high.

Since then, it has dropped below 55% while stocks have continued to rally.

That should be a great sign for the future, right?  We survived the overbought reading without going down, and the market is now "neutral" in terms of that standard definition of breadth.

Let's check.  We'll go back to 1950 and look for any other time that the 10-day Up Issues Ratio hit at least 60% during the past two weeks, but has since declined to under 55%.  During that same time, the S&P 500 rallied (by any amount) and hit at least a 3-month high.

The results are surprisingly tame.  Across most time frames, the future performance of the S&P was in line or slightly below random, in terms of both median return and percentage of time positive.

When we look at whether the S&P was in a bull or bear market at the time (defined as a rising or falling 200-day moving average), then the results change a bit:

Honestly, I'm surprised by the bear-market stats.  I would have thought that a market that hit overbought and then managed to rise during a bear market would be a signal of latent buying demand and a sign of a low.  But not so much.

Overall, I can't find much that gives us an edge here.  While a common refrain from analysts is that a relief of the overbought conditions is by definition a positive development, testing for such doesn't prove it out.

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