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The market surge after the Fed announcement has moved the market to overbought readings in our 10-day SARSI indicator, as well as our intermediate-term 40-day SARSI indicator.

Our back-testing shows that when the market reaches overbought levels, such as we are seeing now, the performance shifts to companies with strong earnings and high relative strength. We would characterize this shift in performance as a move toward

Investor's Business Daily

100-type names.

The relative outperformance of these stocks makes sense from a sentiment standpoint. The market has put in a significant rally to reach the current overbought status, which means that traders are moving into the acceptance phase of the rally and becoming much more bullish. Once traders become bullish, they start reaching for risk and drive high-growth momentum stocks to the forefront of the market.

Our research also shows that buying pullbacks in these names produces better results than buying the breakout to new highs. This suggests that traders should look for buys in the highest earnings and relative-strength stocks and avoid the weaker secondary names hoping that they will catch up in performance. Traders should also avoid chasing these names and look for opportunities to get long once the stocks cool off and pullback.

One sector that holds several strong relative strength stocks has been the dry shippers. These are the companies that are shipping bulk dry goods, such as iron ore and coal to China. Bulk commodities have become a major export to China as their industrial base continues to grow.

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A representative example of a company displaying all the characteristics we discussed in this space is

Diana Shipping



This stock has been in a long-term uptrend since emerging from a basing process last fall. With the exception of the August weakness, the stock has consolidated since July and is starting to turn higher once again. The consolidation qualifies as a short-term base within the uptrend. This is a bullish set up and is supportive of higher prices.

The group's strength also bodes well for DSX since several other stocks within this sector are also relative-strength and earnings leaders and have moved out to new highs. Look for a move above the $29 level as indication a new leg up is underway. Important support can be found in the $24 area. A breach of that level would take the stock off the offensive.

At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.