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Play it Again Sam: This Important Short-Term Indicator is Warning Investors the Market is Even More Overbought

We thought it was important to show how The Investor Intelligence Short-Term Composite Indicator (see chart) has moved even further into overbought territory at close to 80% from slightly below 70% two weeks ago when we last wrote about this important short-term market timing tool – a tool that has proven to be invaluable for sophisticated traders since it was developed in the 1960s. A reading of over 70 means the general index has become overbought. Below 30, it has become oversold. In late December, as shown in the chart below, it was at a very oversold 4%, a reading that proved to be very accurate considering the subsequent stock market bounce.  The recent market bounce has rapidly moved the indicator to higher and higher overbought levels. The fast-moving pace of this indicator is another clear warning sign that the market continues to be highly volatile, and very risky. We recommend investors lighten their stock portfolios. We expect more and bigger downward corrections than the one that occurred in the fourth quarter before stocks reach oversold levels that would trigger a durable, longer-term rally.

Play it Again Sam: This Important Short-Term Indicator is Warning Investors the Market is Even More Overbought
Play it Again Sam: This Important Short-Term Indicator is Warning Investors the Market is Even More Overbought

Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

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