We have been watching for indications that markets are moving toward an overheating status. As we have discussed previously, when either there is too much optimism or pessimism, there is often an over-reaction and then a corrective period or quick reversion if you will.
To get a better read on this, we created the Key Reversal Indicator (KRI) that has the potential to find turning points. What we are looking for is readings well into the area that exceeds a “normal” market condition and move so far that a snap in the other direction could occur within days. It is not just that markets move in one direction for a period of time of directionally, we are talking about the underlying metrics of several different indicators, including psychological measures that make up this indicator.
Over the past few weeks, stocks have been riding a nice rally and there have been a couple of occasions that the KRI started to creep into a overheating zone. However, the maximum reading that we saw was not enough to actually push the indicator so far as to call an imminent reversal. Note on the chart below that there was a spike last week, but it was just below levels of concern.
For now, the KRI is above equilibrium and may see some consolidation moving forward. However, at this time, it is not pointing to a condition that is more than simply corrective.