After the three week rally we've had the majority of stocks are extended well past any safe buying point. Two-thirds of my universe of stocks have a %b of 0.75 or higher, and 88% have a %b of 0.5 or higher. (%b tells where a stock is in relation to it's Bollinger Bands -- 0 is at the lower band, 0.5 is at the middle band/moving average,
and 1 is at the upper band.) Compare that to what I pointed out back on May 9th, in my 'Even Uglier Than it Feels' post:
only 15% of them have a %b above 0.5. 44% are at 0.1 or less, and a whopping 26% are at or below zero! That's just plain old fugly.
So while today's reading aren't quite as extreme as those numbers, I still think it's wise to let the market cool off a bit before initiating new long positions. Of course the rally could still continue, and it does look like the indices are set to walk up their rising upper Bollinger Bands, but the risk/reward on new long positions is pretty bad here. I'm still clinging to some longs that I bought over the past weeks, but I don't see much that's in a safe buying position. There were several relatively weak stocks that made shooting stars yesterday that are on my short list for today. If they trigger I'll look to play those for a quick trade. But since I'm not seeing a lot of short candidates I won't get too aggressive on the short side. I have to respect the strength being shown in the market right now, so I'll just look to short some of the weaklings that pop up on my scans.
For some other reading, Market Pulse has a couple of good posts up. The first looks at the current Dow Theory non-confirmation. The second comments on a SafeHaven article about the soaring Put/Call Ratio.
