Are Stocks Ready For a Correction?
The S&P 500 settled above the 1,200-mark on Wednesday's trading session, setting another key milestone for the market, and trading at its highest level since September 2008. In the past two months alone, the index posted a gain of nearly 13 percent, closing in the green 30 of the past 42 trading sessions. While the bullish momentum may be well received by some, the rate of acceleration might be making others nervous.
One tool widely used by technical traders to determine the momentum of a security is moving averages, which serve to smooth out price fluctuations, highlight trends, and define support and resistance levels. Indeed, since the March low last year, the S&P's 50-day moving average has been one of the benchmarks broadly used to spot any unusual patterns or extreme price movements.
In particular, investors pay attention to large movements away from moving averages, with the assumption that the index could be entering overbought levels. In the past six months and on average, for example, the S&P traded within 2 percent of its 50-day MA. As of Wednesday's close, the index is 6.5 percent over this mark.
So far in 2010, the S&P advanced nearly 9 percent. Keep in mind that the average yearly return for the index in the past 15 years, stands at 8 percent, with a median value of 14 percent.
Although a bullish trend may not necessarily mean that the market is overvalued, it could
certainly serve as point of reference as per when investors may start taking profits off the table.
Other technical indicators including the Relative Strength Index, which is at its highest level since October 2006, Moving Average Convergence / Divergence (MACD) and Bollinger Bands, are also pointing to an overbought market.
Among the S&P 500 components that are farthest away from their 50-day moving average, Citigroup and American International Group lead the way .
The table below depicts the companies that are trading at greatest distance above their 50-day moving averages.
S&P Stocks Trading Farthest Below Their 50-Day MA
On the other hand, investors may also may find opportunities by looking at companies that lagged behind the rest of the group. Of the 500 companies that make up the index, for example, only 52 are trading at or below their 50-day moving averages. Of these stocks, Monsanto and CF Industries are trading the farthest below.
Here is a look at the laggards of the rally.