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A Major Concern for Traders Right Now

By Brian Hunt, Editor in Chief, Stansberry Research
Friday, February 10, 2012

If you need another reason to take Jeff Clark's advice and stay short-term cautious toward stocks right now, today's essay might convince you...
 
You just have to remember that markets are like runners. They can't sprint flat-out for miles without taking a breather from time to time. And since the start of the year, stocks have sprinted...
 
So far in 2012, the benchmark S&P 500 has climbed 7.5%. This is nearly a year's worth of returns in just over a month. This surge has left the market "overstretched"... and vulnerable to a sharp short-term correction.
 
To get an idea of how stretched the market is right now, have a look at the chart below. It displays the past 12 months of trading in the benchmark S&P 500. Note the extra "pane" at the bottom. This pane shows the market's "RSI"... an indicator that measures an asset's "overbought" or "oversold" status.
 
An RSI reading over 70 means a market is overbought and due for a correction. An RSI reading under 30 means a market is oversold and due for a natural rebound. In other words, a market with a high RSI reading is a rubber band stretched to the upside and ready to snap lower... a market with a low RSI reading is ready to snap higher.
 
The S&P 500's RSI is Reading the Highest in Over a Year
 
As you can see, the stock market's RSI reading is as high as it has been in almost a year. Each time stocks have gotten to this "overbought" level, they've suffered sharp short-term selloffs.
 
Realize... this is a trader's concern, not an investor's concern. It's no cause to sell any long-term investment like a good dividend-paying stock.
 
But if you're considering putting on any long-side trades now, it's worth keeping this "overstretched" condition in mind. With the market in this position, a 3%-5% correction down to around the 1,300 level is a chip shot.
 
Regards,
 
Brian Hunt




Further Reading:

One of master trader Jeff Clark's go-to indicators is close to signaling "sell." Last time it signaled was back in November, just before the market dropped 8% in 10 days. Read more here: Another Reason to be Cautious in Today's Market.

In The Daily Crux
Market Notes
Treasury bonds quietly shift into a downtrend... big treasury fund TLT touches a three-month low.
 
Natural gas terminal operator Cheniere Energy hits a three-year high... its shares have tripled since October.
 
Apple software supplier Nuance Communications breaks out to an all-time high.
 
Junior miner recovery continues... TSX Venture Index is sitting at a three-month high.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1349.96 +0.2% +1.9%
Oil (USO) 38.33 +0.8% +5.0%
Gold (GLD) 168.02 -0.3% +26.3%
Silver (SLV) 32.90 -0.4% +11.5%
U.S. Dollar 78.62 +0.2% +0.7%
Euro 1.33 -0.1% -2.8%
Volatility (^VIX) 18.63 +2.6% +17.4%
Gold Stocks (^HUI) 533.09 -0.2% +0.4%
10-Year Yield 2.05 +3.5% -43.7%

World ETFs
Symbol Price
Change
52-Wk
S. Africa (EZA) 69.00 +0.3% +8.0%
USA (SPY) 135.36 +0.1% +4.5%
Lat.America (ILF) 48.82 +0.2% -0.3%
Singapore (EWS) 12.83 -0.4% -1.5%
China (FXI) 40.09 -0.8% -1.6%
S. Korea (EWY) 59.19 +0.0% -1.9%
Canada (EWC) 28.44 -0.3% -9.3%
Taiwan (EWT) 13.48 +0.9% -10.0%
Israel (ISL) 13.71 +0.3% -10.0%
Japan (EWJ) 9.75 -0.3% -12.2%
India (IFN) 23.37 +0.5% -17.2%
Russia (TRF) 16.48 -0.8% -30.4%

Sector ETFs
Symbol Price
Change
52-Wk
Retail (PMR) 24.05 +1.3% +22.2%
Big Pharma (PPH) 73.61 +0.6% +16.0%
Utilities (XLU) 34.87 -0.3% +13.6%
Health Care (IYH) 74.79 -0.3% +13.3%
Consumer Svcs (IYC) 76.91 +0.4% +10.1%
Big Tech (QQQQ) 62.91 +0.7% +9.6%
Real Estate (IYR) 61.26 -0.7% +8.3%
Biotech (PBE) 22.55 -0.8% +6.7%
Transportation (IYT) 94.81 +0.3% +4.7%
Industrials (IYJ) 70.55 +0.3% +1.8%
Construction (PKB) 13.84 +0.3% +1.0%
Defense (PPA) 20.03 +0.3% -0.4%
Software (PSJ) 26.04 +0.5% -0.5%
Water (PHO) 19.14 +0.3% -2.2%
Media (PBS) 14.45 +0.1% -2.9%
Insurance (PIC) 16.11 -0.6% -2.9%
Telecom (IYZ) 22.08 -0.1% -3.4%
Internet (HHH) 70.21 +0.1% -3.6%
Basic Mat (IYM) 73.25 +0.1% -4.9%
Financials (IYF) 54.93 -0.2% -7.6%
Oil Service (OIH) 121.00 +2.4% -10.7%
Semis (PSI) 15.97 -0.1% -11.3%
Nanotech (PXN) 6.70 -2.1% -34.7%
Alt. Energy (PBW) 6.45 +2.4% -39.5%

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