Trading Nation

'Bipolar' market in for a speed bump: Bespoke

Hickey: Stocks are becoming overbought

The market could be in for a "nasty cocktail" if traders see hawkish commentary from the Fed on Wednesday, according to one strategist.

"It's bipolar. You go from one extreme to the other in order to remedy the situation," Bespoke Investment Group's Paul Hickey said Tuesday on CNBC's "Trading Nation." "A hawkish tone from [Fed Chair Janet] Yellen could be a nasty mix."

Stocks have rallied more than 11 percent since mid-February after collapsing 15 percent at the start of the year. And by Hickey's work, the massive swing has created a curious phenomenon in the marketplace where a majority of equities in the S&P 500 are now considered "overbought."

Overbought stocks can be defined as stocks trading one standard deviation above their 50-day moving average. Oversold stocks are those doing the opposite — trading below their 50-day moving average. Through Tuesday, 68 percent of stocks in the S&P 500 were overbought while just 1.2 percent were oversold.

"It's up to 68 percent, which is the most we've seen since October 2013," said Hickey. "Only 1 percent of the S&P 500 is trading at oversold levels and that's the fewest since May 2013. This is the type of scenario you don't see very often."

According to Hickey, robust moves like this don't reflect changes in the market fundamentals, but rather speak to investor fears of missing out on a sharp rally.

"If the move was being driven by a fundamental factor, you would expect to see certain sectors rally while others lagged, but in this rally everything is going up," Hickey said.

And when everything goes up, the stakes are higher.

When so many stocks are trading at overbought levels, Hickey said the Fed's tone will dictate with a heavier hand which direction the market will swing.

"If you go over a speed bump at 60 mph it's going to be a lot more impactful than a bump in the road at 5 mph. So it could create more of a hiccup going into tomorrow if you see a more hawkish tone from the Fed," Hickey said.