It's probably no surprise that a streak of nine consecutive weekly gains – the longest since 2004 – leaves the S&P 500 index in what technicians call “overbought” territory as the new year begins.
Unsurprisingly, this points to the possibility of a short-term pause in the S&P 500.
SPX
rally, but the message from such strong runs is quite positive for future returns, Jeff deGraaf, president and head of technical research at Renaissance Macro Research, said in a Tuesday note.
Pointing to the chart below, he notes that “these events are typically a confirmation of momentum and continuing trend, rather than a liability.”
Macroresearch of the Renaissance
What about those overbought conditions? In the jargon of technical analysts, an overbought asset has become overvalued, perhaps rising too much too fast. That can be measured by indicators, such as the relative strength index, which measures the speed and change of price movements.
Analysts can also use other measures to discern when an asset is overbought or oversold.
Of course, assets can continue to rise after being overbought, or fall after being overbought or oversold, as illustrated by this post on social media platform X late last week by Charlie Bilello, chief market strategist. from Creative Planning.
In the case of the S&P 500, there is "no doubt" that the large-cap benchmark is tactically overbought, deGraaf wrote, noting that 10-day advances are in the mid-60% region, inflows into exchange-traded funds stocks that track the S&P 500 have become “excessive” and the performance of high versus low beta stocks is in the 98th percentile. High beta stocks tend to be more volatile than the overall market, while stocks with low beta they are less volatile.
"All of that suggests the possibility of a pause, but it should be used opportunistically to build long positions in new names and industries of relative strength," he wrote.
The S&P 500 rose 24.4% in 2023, ending the year just 0.6% lower than its record close of 4,796.56 points set on January 3, 2022. The Dow Jones Industrial Average
DJIA
It also posted nine consecutive weekly gains, its longest streak since 2019, as it ended up 13.7% heading into 2023.
See: Here are five things that could disrupt the US stock market rally in early 2024
