by Chris Johnson | September 10, 2012 8:00 am
The ECB-induced rally sent stocks higher on Thursday as investors watched Mario Draghi tap another keg of central bank action to keep the monetary policy party going.
We’ve used the quote “its hard to be bullish on monetary policy alone” quite often over the last year, but the markets just aren’t paying attention to how much fiscal policy they’re drinking. And the hangover will set in once the world’s central banks have to start paying the tab.
So, while watching the markets shoot higher yesterday — the S&P 500 (NYSE:SPY) and other indices crested to new 52-week highs — our screens started lighting up with a myriad of “Overbought Warnings.” The warnings come as we head into seasonally-weak September, adding some urgency to heeding such red flags.
For the purposes of today’s writing, I’m taking a look at the more heavily-weighted companies in the Russell 1000 Index (NYSE:IWB) to find ones that are hitting dangerously high overbought readings of their Relative Strength Index.
To no surprise, the list of overbought companies is heavily represented by financial stocks. After rallying about 3.5% over the last two days, the Financial Select Sector SPDR (NYSE:XLF) has spiked to an overbought condition, suggesting to us that the sector is likely to see some profit-taking over the short-term.
The chart to the right shows the top ten companies with overbought warnings as of today. In the financial sector specifically, these three are at-risk due to their overbought readings:
Morgan Stanley (NYSE:MS) is the first hitting an overbought condition just as its price is nearing the $17 level, which is important due to the consolidation that took place in May at this price. The stock will be a profit-taking target unless we see MS shares convincingly break through the $17 price early next week.
Unlike Morgan Stanley, Sun Trust (NYSE:STI) has been on a tear — shares are up more than 40% year-to-date. The stock has just hit an overbought position of $28, making it likely that we’ll see some profit-taking. This will just create a buying opportunity for those still looking for a bullish play in the financial sector, though. Look at a move to $26 as an opportunity to get in on this financial juggernaut.
Banking supermarket Citigroup (NYSE:C) has run more than 6% over the last two days, right into potential chart resistance at the $32 level. In addition to the potential chart resistance at $32, the majority of the call option open interest for C currently resides between the $30 and $32 strike, indicating that the options market may add to overhead resistance as C tries to break above $32. At best, C shares will tread water at these prices, but more realistically, we’ll see C shares trade back to $30 soon.
As of this writing, Chris Johnson did not own a position in any of the aforementioned securities.
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