This is a table I use which looks at various asset classes, including equities, FX, fixed income, commodities as well as sector ETFs in order to get a sense of which sectors are currently overbought and oversold. The percentile column represents the degree of overbought or oversold vs. a security’s historical pricing based on a proprietary technical indicator that I developed which looks at the 1-month and 3-month standard deviation of any security’s performance as well as the current relative strength of that security. This indicator often provides an interesting perspective on the degree to which any security is overbought or oversold and helps me paint a mosaic of the underlying market narrative and what is being priced in. While not perfect in calling reversals, as the degree of overbought or oversold can alleviate itself in time or price, this indicator helps me create trade setups, particularly into larger macro catalysts that may lead to a reversal.
We can see in the chart below that Energy still remains amongst the most overbought areas of the market with OIH and XLE the most overbought sector ETFs and gasoline (XB) and crude (CL) toward the top of the range as well. We can also see 2yr yields remain quite elevated as does Bond volatility (MOVE). In the oversold camp, we find HYG, Growth vs Value index along with some of the growth sector ETFs like XLC, IGV, ARKK and MTUM.
We will be watching these indicators closely in the coming days for signals that the market has found a short term capitulation bottom to help guide us toward getting off of our short exposures. But for now, we still favor being short biased amidst the Fed tightening and elevated geopolitical concerns.
I will be using this indicator in future posts so I wanted to put it out there today as I launched my first official EDGE post. More to come. Feel free to email me at craig@laductrading.com or message me in Slack with any questions.
