Yesterday, the S&P 500 flashed a pretty rare and equally spectacular technical indicator.
That is, for the first time in more than a year, the stock market became extremely technically overbought.
Specifically, the relative strength index (RSI) on the S&P 500 popped above 80 yesterday.
That’s extremely rare. And prescient investors will know that it was a major “buy signal”…
Because almost every time the market has done this since 1950, stocks proceeded to soar over the following year.
History Suggests a Pullback and Major Rally Are Ahead
Traders use the relative strength index to gauge how overbought or oversold the market is at any given time. When the RSI drops below 30, the market is considered oversold. When it pops above 70, the market is considered overbought.
Since Thanksgiving, the S&P 500’s RSI has been above 70 pretty consistently. But yesterday, it popped above 80 – meaning the S&P 500 isn’t just overbought; it is extremely overbought.
The last time this happened was in late 2020, when the stock market was escaping the COVID crash.
Following the frenetic post-COVID rally during the summer of 2020, the RSI on the S&P 500 popped above 80 in late August of that year. Then the market pulled back about 10% in September, before soaring 50% over the next year and change.
History suggests the exact same thing could happen to stocks over the next 12 months. So, likely up next? A brief pullback in January, followed by a huge rally throughout the rest of 2024.
After all, this is typically what happens after the S&P 500 becomes extremely overbought for the first time in over a year.
We analyzed data going back to 1950 to get a read on stock behavior after the market becomes this overbought. And in the month after the S&P 500 becomes extremely overbought for the first time in over a year, stocks tend to bounce around. The market rises about 50% of the time and falls about 50% of the time, with an average return of basically zero.
But over the next 12 and even 24 months, stocks pretty much always soar.
The Final Word on the Overbought S&P 500
That is, in the 12 months after they become extremely overbought for the first time in a year, stocks rally 85% of the time. And in the following 24 months, they rally 90% of the time. Average returns in the following one- and two-year periods are 16% and 19%, respectively.
In other words, after the market becomes this overbought for the first time in a year, stocks tend to pull back over the next month – then soar over the next 12 and 24 months.
That’s the pattern that was signaled yesterday.
And that means stocks will likely fall in January – before they absolutely soar throughout the rest of 2024.
You need to buy that dip.
But do you know which stocks to buy on that dip?
Don’t worry – we’ve got you covered.
We are currently compiling a special research report on our Top 10 Investment Themes for 2024 – as well as our top stock picks for each.
And we plan to publish that report this week.
