According to a blog post from Pension Partners, the Dow is trading at one of its most overbought levels in history on a relative strength basis (RSI) going back to 1900.
However historically, similar signals have been bullish in the near-term, on average. According to the author’s analysis, the Dow has actually been higher about 70% of the time in the year following such an extreme reading. Of course, that means 30% of the time it was down, which isn’t insignificant.
Regardless, market timing is a fool’s errand and isn’t an advisable strategy for most of us. A few things to remember in the context of bearish sentiment:
- Stay the course – if you’re prepared you have nothing to fear.
- Along those lines, ensure your portfolio is well-constructed and properly diversified.
- Filter out the noise – there is a lot of fear-mongering out there, which may be justified, but reacting to it isn’t going to help you achieve your objectives.
- Don’t make any rash decisions – it’s tempting to hit the sell button (or buy button for that matter) when you read or hear something from someone you believe to be knowledgeable, but buying and selling on whims like that won’t yield the results you’re hoping for.