So far in 2013, the S&P 500 has rallied just about 6.5% without any real consolidation in price. While the price action feels very extended, it’s mostly because of the one-way uphill street we have taken so far this year. To put this in context, however, just looking back 12 months reveals that at this time last year, the S&P 500 was about 2% higher and ultimately rallied around 13% year-to-date before a correction arrived in early April.
Furthermore, the below chart of the S&P 500 also reveals a pattern that has now repeated three times since October 2011; the pattern is simply one of consolidation followed by major breakouts.
- January 2012: Led to a rally of just more than 12%
- August 2012: Led to a rally of about 6%
- January 2013: So far, a rally of around 5% as measured from the breakout point.
Simply put, while stocks are extended near-term, from a pure price-action point of view, they certainly could rally further before a better correction ensues.
As it usually goes, the deeper into a rally we go, the more selective the group of stocks moving higher becomes — meaning it’s more difficult to pick the ones with further upside room. From this point of view, it might be a good idea to just trade the index at this stage in the rally as opposed to try finding stocks to outperform.
I also see plenty of overextended stocks that haven’t come to take any breather yet this year. While it might be somewhat early in leaning too much against these stocks in the near-term, if and when the broader market finally reaches an exhaustion point, these stocks will be the ones worth shorting (or at least trimming for those already long the stocks).
Without further ado, here are three stocks that on my charts have reached dangerously overbought levels:
The Dow Jones Transports have now rallied 16% in a more-or-less straight shot since their breakout in December 2012. Ditto for FedEx (NYSE:FDX), which is now a solid 15% higher without so much of a look back over its shoulder. FDX also is very extended past its 200-day simple moving average and has been flashing negative divergence to its momentum oscillators.
Next up, Manpower (NYSE:MAN) — which rallied more than 30% in a straight shot since breaking out past simple lateral resistance in December 2012 — is much overextended. Just like FedEx, the stock has really stretched its move past the moving averages and is just running on fumes in the near-term.
Last but by no means least, the broker/dealer group of stocks — as measured by the AMEX Securities Broker/Dealer Index — has staged a 20% vertical rally since December that rivals any rocket launch. Belonging to this group of course is Goldman Sachs (NYSE:GS), which has jumped about 25% since late December.
Given the vertical moves of the above stocks, the odds of them moving much higher in the near-term are deteriorating by the minute. As selectivity among stocks with further upside subsides at this stage in the broader market rally, look for an increasing number of stocks resembling the above moves and stay away from them on the long side.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter here.