The S&P 500 Equal Weight Index has traded sideways since the middle of last year. Through this sideways trading range, it has some sharp fluctuations. The chart below shows the index’s fluctuations.
Source: Canterbury Investment Management. Chart created using Optuma Technical Analysis Software
From a technical perspective, overbought and oversold indicators have provided a good indication of market direction over the last two years. When an index or security becomes overbought, it suggests that it is likely to pullback. When an index or security becomes oversold, there is a higher likelihood of a rally. As you can see in the chart below, which shows the Equal Weight S&P 500 with its RSI indicator (highlights overbought/oversold conditions), each extreme fluctuation has come at a time when the RSI reads overbought or oversold.
Source: Canterbury Investment Management. Chart created using Optuma Technical Analysis Software
Bottom Line
The month of December is historically a stronger period for markets. Perhaps the holidays create consumer optimism. That being said, markets have behaved erratically. Investors felt much differently at the end of October than they did at the end of November. We highlighted consumer sentiment in last week’s update. Emotional, volatile swings in markets are not healthy.
As this update showed, markets are broadly “overbought.” Overbought conditions typically precede a pullback, and in the recent market environment, pullbacks have been large. We continue to monitor market conditions and evaluate portfolio holdings for potential rotations.