Overbought conditions reflect bullishness, and bullishness drives momentum rotation strategies | chart of art

Momentum and trend strategies start here in a big way in 2024. Typically, this strategy buys leading stocks that appear overbought. Although it often goes against our “gut” to buy stocks that appear to be overbought, overbought conditions reflect strong buying pressure, which is certainly more bullish than bearish. Let’s take a look at the broader market and some recent examples using UBER.

Stocks soared in early November on the S&P 1500 Zweig Breadth Thrust signal and appeared overbought by late November. The S&P 500 and Nasdaq 100 rose 8.9% and 11.4%, respectively. TrendInvestorPro’s composite breadth model turned bullish in early December and showed stocks overbought again in late December. In December, the S&P 500 was up 4.4% and the Nasdaq 100 was up 5.5%. The Composite Breadth Model is a 14-indicator width model used in TrendInvestorPro’s broad market timing.

Despite big moves in November and December, stocks didn’t stop rising until late 2023. Instead, it continued its upward trend from January to February, led by the Nasdaq 100. This rise expanded further in March, with the S&P 500 taking the lead. The Nasdaq 100 soared 1.2% in March and the S&P 500 soared 3.1% this month. Once again, the market is overbought and appears ripe for a correction. There’s no disputing this assessment, but downsides are unpredictable, especially during a strong uptrend. There will be a fix someday, but I don’t know when. Perhaps we should stop using the term “overbought” when the trend is up and take the term overbought at face value. Overbought is really just another way of saying “strong.”

The dual momentum rotation strategy is designed to take advantage of leading stocks with strong price movements. This methodology buys the best performing stocks and sells them when they fall below a certain ranking. The chart below shows an example trade using Uber Technologies (UBER). UBER entered the model portfolio as a top stock on February 5, with RSI exceeding 70 (vertical green line). When RSI is above 70, it is considered overbought. In fact, anything above 70 indicates strong upward momentum, which is more bullish than bearish. Prices rose and UBER rankings fell by the end of March (red line). UBER did not make any more cuts and this triggered a breakaway signal.

TrendInvestorPro’s Dual Momentum Rotation strategy, which focuses on the strongest stocks within the Nasdaq 100 and S&P 500, is up double digits so far this year. When trading leaders, be careful about chasing performance as not everything will be roses and there may be downsides along the way. This strategy had a decline in 2022, a nice recovery in 2023, and a decline in 2023 (September) as well. These strategies are fully systematic and traded weekly. Rankings and signals are posted every Saturday morning for subscribers. Click here to view performance indicators and learn more.

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