Relative Strength Indicator: TOP!

By: Guy Lerner | Thu, Aug 29, 2013
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Figure 1 is a weekly chart of the SP500. The indicator in the lower panel is a composite that looks at the relative strength of the 9 SP500 sectors: Materials, Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Technology and Utilities. The indicator has been smoothed with a 39 week exponential moving average. When looking at the data, which goes back to 2001, we have noted in past articles how effective the indicator was at identifying intermediate term market tops. In other words if an investor was patient, they could get better entry points.

Figure 1. Relative Strength Indicator
Figure 1. Relative Strength Indicator
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In mid June, we noted that the indicator was in the "Danger Zone". Shortly thereafter we provided data to these observations; when the indicator reached these extreme levels, there were always better points of entry. In late July, the extreme reading was "Pointing to a Market Top". The indicator started to "Rollover" last week, and this week it looks like the top is in! The indicator still remains at a high value. Our interpretation has been the same for over 2 months now: our relative strength indicator remains consistent with a market top, and the indicator still continues to act within the realm of prior instances when it was extreme. Once again, we are closer to the end of this rally than the beginning.



Guy Lerner

Author: Guy Lerner

Guy Lerner
Tactical Beta

Guy lerner

Guy M. Lerner, MD has been writing about the markets for over 10 years providing readers with independent and original market analysis. Lerner is the principal partner in ARL Advisers, LLC, a registered investment advisory in the State of Kentucky. ARL Advisers, LLC offers a tactical asset allocation strategy that is strategic, balanced, and targeted. You may contact him through customer service.

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