Stock Momentum Measure Signals More Gains: Technical Analysis

March 11 (Bloomberg) -- The yearlong rally in the U.S. market has pushed the number of stocks showing unusually strong momentum to the highest level at least since 1994, a sign that more gains may come, according to Concept Capital.

The New York-based institutional broker defined “overbought” as when a stock’s 21-day stochastic reading exceeds 80. On March 9, 77 percent of the companies in the Standard & Poor’s 1500 Composite index reached that threshold, exceeding the previous high of 74 percent in April, Concept Capital said.

“While a sign of a short-term overbought condition, which could usher in a pause, readings this extreme have historically led to higher prices over the next several months,” John Kolovos and Craig Peskin, technical analysts at Concept Capital, wrote in a note to clients yesterday.

Using stochastics, which analyzes momentum to capture a security’s turns in direction, Kolovos and Peskin identified the previous nine most overbought conditions from 1994 to the present and found that, following these days, the S&P 1500 on average rose 1.9 percent in one month, 4.7 percent in three months, and 8.5 percent over the next six months.

The current spike in the S&P 500’s level of overbought stocks is the fourth highest dating back to 1990, the Concept strategists said.

U.S. stocks marked the one-year anniversary of the 2009 bear-market low this week amid speculation that the economy will continue to recover from the worst contraction since the Great Depression. The Standard & Poor’s 500 Index, a benchmark for the market, has surged 69 percent from its 12-year low. The S&P 1500 is up 72 percent during the period.

Kolovos and Peskin, former ISI Group Inc. and Lehman Brothers Holdings Inc. analysts, joined Concept Capital last year to run the firm’s technical research unit. In technical analysis, strategists study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.