The following is an excerpt from the June 7, 2013 blog for Decision Point subscribers.
The Percent Buy Index (PBI) shows the percentage of medium-term BUY signals for all the stocks in the S&P 500 Index, and the chart tells us if the index is medium-term overbought or oversold. Toward the end of May the PBI hit the highest reading (94.2) in its almost 14-year history.
Generally speaking, the market runs in cycles where it gets better and better until its as good as its going to get. Then it turns and gets worse and worse until it is as bad as its going to get. The PBI helps us discern approximately where the market is in this irregular cycle. When the PBI reaches extremely high levels, a market correction or consolidation clears the extreme overbought readings. Currently, the price index is also overbought, being at the top of a long-term rising trend channel.
When we see such a long period like this, we need to remind ourselves that we will get a sense that things happen more quickly than they actually do in real time. For example, the 2011 top took about six months to play out, and the 2007 top took almost nine months. We can't expect that things will happen as fast as we are anticipating.
Conclusion: The price formation and PBI offer strong evidence that the market needs to digest or correct the external and internal extremes it has reached. We don't know what form that will take, but, at the very least, it is likely that the advance will be stalled for some time.
Technical analysis is a windsock, not a crystal ball.
