During the six months from September through February the market became oversold only once. It was a remarkable period where there was barely any weakness. I boxed that period in green in the chart below. More recently, the market has oscillated between overbought and oversold. I boxed that period in yellow.
I believe that we are now in a market where we will continue to see two way trading. It will pay to sell when we are overbought and buy when we are oversold. The one way trading we saw that started in September is over.
Heading into September the buzzwords were "risk off" and "de-risk". Equity allocations were low. These low allocations in a rising market forced managers to chase equities higher and resulted in a one way market. Currently, institutional surveys show high equity allocations and hardly any bearishness or short selling. In September we were heading into the strong part of the year. We are now entering the seasonally weak part of the year. I believe we are in a different market than many have become used to.
I believe there is a decent risk of a decline this Summer. However, even if the market manages to work its way higher I expect it will do so in more of a stair step manner rather than straight up. This will lead to trading opportunities both ways.
At the current juncture the market is overbought but has room to get more overbought through tomorrow. At the same time seasonality is strong the first couple of days of the month but then turns weaker. If we are in more of a two way market than the bears should have the upper hand starting Wednesday.