Equity Markets: Overbought or Oversold?

Market Condition

It is not unusual to be asked, is this a good time to purchase stocks, index funds, or ETFs? Is the market over valued or under valued? While there are always individual stocks in either camp, the question today is a broad market query. One indicator I use to answer the question is the Relative Strength Indicator (RSI) graph for the Vanguard Total Market Index ETF, VTI. Below is the graph of which I speak. If you prefer the latest version, click on this link. I hope your computer screen is sufficiently wide to handle this graph. Now look at the bottom graph and you will see the VTI was recently well above the 70% line. That tells us that the market is over valued or now is not the best time to purchase equity ETFs that are highly correlated with the VTI ETF. For a different opinion, scroll down below the graph and read a counter argument.


Equity Markets Not Overbought is the title of an article I ran across on Seeking Alpha. Using the authors own arguments, if the market is not overbought, it is getting mighty close to that condition. Given the RSI graph and the fact that the majority of stocks are above their 200-Day Moving Average, one can conclude that the market is certainly not oversold.

With these conflicting viewpoints, what is an ITA Wealth Management investor to do to break this logjam of information. Let us take a look at what the Quantext Portfolio Planner "Delta Index" is telling us about the different asset classes we use to construct our portfolios. Below is the latest analysis as of 11/9/2010. Take a look for yourself.

To see the following analysis, sign up for a Platinum membership. Cost is a mere $5.00 per month.

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