The feature article goes into some depth as to what an overbought condition actually means. In most cases, a severely overbought market does not generate a sell signal right away (and neither does a severely oversold market generate a buy signal immediately). The most overbought and oversold dates in history are included in the article.
One of our signature sayings is “Overbought does not mean ‘sell’.” But what does it mean? In this article we’re going to explore the most common overbought condition that occurs in our indicators – those of the breadth oscillators.
This week’s feature article is a continuation of the one in the last issue. Here, we describe option strategies that are similar to owning stock, or are at least a way to reduce time value exposure, while still retaining some leverage in a speculative position.
What first appeared to be an oversold rally gathered so much steam that it has negated our previously bearish outlook (see indicator review, page 6).
The common perception among option traders is that option buying is the “best” approach to a speculative situation because of the great leverage that the calls or puts provide. But in many cases, ranging from extremely short-term holding periods to ones of more moderate length, where limited stock moves are likely, one may be better served by trading the underlying entity than by buying options.
The feature article deals with two indicators that we have occasionally referenced. They are long- to intermediate-term indicators and both are either on a sell signal or on the verge of one. The studies involving these indicators were much more complicated than normal systems because of the longer-term nature of the holding period.
Two indicators that we have only briefly discussed in the past are now at an overbought state. Since each has merit, it was decided that a study should be done on the data to see if there was some usefulness other than just yet another overbought indicator. Sometimes when one looks at data in just the right way, a new thought for an indicator will jump into one’s head, and that’s pretty much how these came about.
For the second time this year, the feature article discusses the overbought state of the stock market. There are quite a few overbought conditions, and all are enumerated in this article. However, overbought does not mean “sell,” unless some actual sell signals are received – which, so far, have been lacking.
When one says that “the market” is overbought, he really means that a number of trusted indicators are in extreme states of bullishness. Recognizing that “the market” is overbought is only moderately useful. That’s because an overbought market can still rise strongly, while remaining overbought. Things work similarly, but in reverse, for oversold markets.
The feature article deals with the fact that, once again, $VIX is receiving criticism when it really shouldn’t. Most people really don’t understand what $VIX should and shouldn’t be used for. We try to shed some light on the topic, in light of recent articles published on the subject.
