Market Insider

The Dow may be getting frothy as a market signal flashes 20-year high

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Stocks have surged so quickly in the past few weeks that a gauge of enthusiasm in the Dow Jones industrial average has hit its highest level in 20 years. And for now, some strategists are on the alert for a near-term pullback in the market.

The technical indicator is called the relative strength index, or RSI, and it shows the relative size of gains versus losses for an underlying market index, usually over 14 trading days. Whenever the RSI climbs above a 70 to 75 range that signals the underlying index is getting expensive.

For the Dow, its 14-day RSI rose above 80 for several days this month to hit 87.4 on Tuesday, the highest since the 87.8 level hit on Nov. 25, 1996.

"That indicates to me that there are an overwhelming amount of buyers. The fact that it hasn't hit that mark since 1996 just shows you how aggressive these buyers are being," J.C. Parets, founder of Allstarcharts, said in an email.

"A correction, either through time or price, is certainly warranted," Parets said, referring to a possible 10 percent drop in stocks. He added, however, that "overbought conditions are a positive, not a negative, from any kind of structural perspective."