The market rally so far this year has generated returns of about 10% on the S&P 500. Given that it is only mid-February, the markets have been on a tear. A closer look shows that many names have quickly recovered from their December selloff. As recoveries go, there are a few different ways traders use to identify short-term overbought stocks. More and more have been calling for the markets to slow down and pull back, but more and more stocks just keep plowing ahead.
One way to tell if the market (S&P 500) is recovering in a healthy way is by measuring the number of stocks that were below their 50-day moving average but have now moved back above. If we look at the S&P 500, there are currently 90.4% of the stocks in this index that are above their 50-day moving average. Looking back to just the end of 2018, that same metric came in at less than 10%.
Another way to measure the recent strength in the market bounce is to see how many stocks are quite close to hitting 52-week highs. Remember that the markets sold off over 20% at the end of last year, dragging every stock lower. If we scan the S&P 500 for stocks that are within 5% of hitting new 52-week highs, we'll find that almost 21% of stocks are in that range.
Given the recent rally, nearly every technical indicator in the short-term is showing an overbought signal and we could very well see a pullback soon. By looking around the S&P 500 to see how strong many of the names are, we can certainly understand and even justify a pullback should it happen.