Reader Mailbag

On the message board reader PJ asked:
Don't you think the market may be adding to its overbought status? Call buying has been high the last 3 days, unlike the earlier buying. A/D line almost steady on a 10-day average but at a new high as a 12-day average.

Seems like we may have to get past the European stress tests to get a read on the market.
My reply was:

We have essentially gone sideways for seven trading days. The S&P 500 closed at 1095 on July 13 and is at 1093 today. We are dropping 3 up days in the next 3 days and after that the market will have largely worked the overbought reading off.

The fact that the market has been able to hang in with the market overbought is a sign of strength. Sentiment does not seem to be an obstacle as the II survey shows as many bears and bulls, Rydex bears are at an extreme and hedge funds have de-risked.

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