It has been an interesting start to the year as volatility has dropped and buyers have thus far been buying every dip, no matter how shallow or deep. The Key Reversal Indicator (KRI) has not shown any significant areas of concern toward oversold or overheating so far.
While there were a couple of times that it appeared that markets were getting toward the upper end of the range (from this indicator’s perspective) in 2013 it has not risen to a level that would be showing that an immediate reversal was in the cards.
The current reading is “Market in Equilibrium” and that moved down on Friday from a slight overheated level. It is important to include the recent history into the equation and can therefore consider the market somewhat hot as it has yet to digest all of the recent readings above equilibrium.
Since the end of February, there has been only one reading that was indicating a heightened level of warning that the excess froth was ready for some selling pressure to come in. That played out well over the next few days. However, since then there has been very little to relieve all of the recent buying pressure, even though the KRI levels have not increased.
Below is the longer-term view along with the S&P 500 index. Notice that it is the cases of extreme outliers that we are looking for. When the KRI moves well above level 3 or below -3, the likelihood of a quick reversal of trend is evident and portfolio positions should be ready to be reversed or hedged.
For now, major U.S. market indices are consolidating and the next directional move could come at any time. With the recent history of the KRI, the odds are in favor of selling pressure increasing moving forward.
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