The markets have been roaring. Yesterday, the Dow Jones Industrial Average set another all-time closing high, gaining 143 points to close at 20,412. The S&P 500
With the markets getting long in the tooth, when will this equity market take a breather?
Perhaps we can shed some light on the disconnect between perception and reality.
The perception is that the market will continue to move higher, because there is nothing to stop it. Any type of bad news is being shrugged off as not important. The bull market will continue higher until it doesn't.
Well, the reality is that the stock market, especially the equity indexes, are near extreme overbought on all time durations - Daily, Weekly, Monthly, and Yearly. This phenomenon has not occurred throughout history very often.
It is true that the markets have never been controlled by the hedge fund community and the algorithm trading systems throughout history the way they are today.
However, overbought is overbought no matter who is in control on the trading - human beings or machines.
As mentioned numerous times in the past, the S&P 500 Trust Series ETF (SPY) volume very infrequently trades over 100 million shares in today's market.
What will happen if there is some type of systemic, global event that is out of the control of the markets? Do not discount that possibility. It is closer than the markets think.
One fat finger can send this market crashing lower, because there will be no bids underneath the market. The abyss is not out of the question.
In a weekly chart of the S&P 500 index, the extreme overbought SST Strategic Number is flashing 99.56. Again, the last time the SPX was this extreme overbought on the weekly time frame was the week ended March 16, 2012.
In addition, the SPX Weekly is trading near its +3 Standard Deviation. The last time that occurred was the week ended May 17, 2013. The same holds true for the DJIA and the COMP indexes.
Thus traders and investors need to understand the risk of where the markets are trading currently.