Wile E. Coyote and the Market Road Runner

By seadmin

Since the lifting of last Tuesday’s election uncertainty, the major market indices have continued their upward march. The Dow still is treading on the path which has led it to new all-time highs, while the S&P 500 and NASDAQ Composite continue their aggressive move into winning territory.

You might think the current strength in this market is something we should all be excited about. Well, if you’ve been in stocks for most of the year, then you most likely are holding on to some unrealized gains. Bravo! Just be careful that those unrealized gains don’t evaporate into the ether when this market starts to come down from its lofty heights.

If you are holding significant portions of cash in your portfolio right now, and if you are reluctant to jump in the market here, then I say you are thinking like a smart risk manager. You see, putting money to work in a market that, by most accounts, is way overbought doesn’t make a whole lot of sense.
Sure, generally speaking it is smart to buy into stocks as they begin an uptrend. But it is not smart to buy into the market when that market is way above its short- and long-term moving averages.

In the chart above, courtesy of my friends at StockCharts.com, we see the S&P 500 trading WAY above its 50- and 200-day moving averages. We also see that the RSI, or the Relative Strength Index, is now at 68.92.

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Historically, when the RSI reading is near or above 70, the market is considered extremely overbought. When the market becomes overbought, i.e., when everyone is scooping up equities pell-mell, it’s a big red flag that a potential trend reversal is near.

My friends, you don’t want to be like Wile E. Coyote chasing the Road Runner here. The investment of money in an overbought market usually results in a loss. Often, that loss can discourage an investor from ever thinking the stock market is "beatable." The result is, in many cases, a complete turning away from the power of stocks to grow your net worth.

If Wile E. Coyote was an investor, he constantly would be chasing profits in vain during overbought markets. An overbought market is similar to a Road Runner, since you never will catch them. And, you’ll always crash and burn trying.

Do you want to learn how to protect yourself from making investing mistakes that can crush your wealth? To find out the secrets to protect principal while still achieving market-beating gains, check out my Successful Investing advisory service. I guarantee it will keep you from acting like a market version of Wile E. Coyote.

To find out how to get started with Successful Investing, click here.

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