Markets Are Short-term Overbought but This May Be a Sign of Long-term Strength
More than 40% of $S&P 500 Index (.SPX.US)$ constituents now have a relative strength index (RSI) of more than 70. While this is an indication that things are overheated, it only tends to happen at the beginning of very strong moves.
The RSI is a technical analysis indicator used to measure the magnitude of recent price changes to determine overbought or oversold conditions in an asset. The RSI ranges from 0 to 100, with readings above 70 indicating an overbought condition and readings below 30 indicating an oversold condition.
There have only been four other times since 1990 when at least 40% of S&P 500 components have overbought RSIs,said Andrew Greenebaum, senior vice president of equity product management at Jefferies.
Usually if an asset's price continues to rise while the RSI is above 70, it may be a sign that the asset is becoming overvalued and could experience a price reversal.
However, despite the fact that an >70 RSI is a trusted signifier of an overbought equity, when it happens to half an index it's a pretty good sign. The 12-month performance afterward was an average gain of 18.32%, with every instance being positive.
Looking at the larger sample of instances where at least 30% of S&P 500 companies were overbought, which occurred 21 times in the last 33 years, the average gain over a 12-month period was 12%, according to Jefferies.
Note: While the RSI can provide valuable insights into an asset's momentum and overbought/oversold conditions, it has some limitations that investors should be aware of. Investors should use it in conjunction with other forms of analysis and exercise caution when interpreting its signals.
Source: MarketWatch, Market Index, Carson Research
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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MonkeyGee : I think that is a very narrow view. yes, more than 40% RSI is over 70, but more than 60% is still 70% below all-time high.
Analysts Notebook OP MonkeyGee : Yes, relying solely on RSI as a trading strategy can be risky. While the RSI can provide valuable insights into an asset's momentum and overbought/oversold conditions, it has some limitations that investors should be aware of. Investors should use it in conjunction with other forms of analysis and exercise caution when interpreting its signals.