Risk reward analysis for US stock market......

US stock market has been on a tear, completed V turn from March 23rd low to 5th June close...a remarkable pace.

Nasdaq made a new all time high of 9845.69.......nobody could have predicted this 11 weeks ago...

SOX also made a new all time high of 2030.47......

SO Nasdaq & SOX are the superstars of this V turn......

Nasdaq & SOX have made a " golden cross " also......

All of the major indices are above 50 DMA & 200 DMA including Russell 2000

All of the above are major technical milestones.......

All this good news calls for some analysis of risk / reward ratio going forward....

When I want to analyze market deeper, then I look to my trusted RSI ...which is as follows :

DOW          74.04

S&P 500     72.48

XLE            71.70

IWM           70.95

Nasdaq       70.95

SOX           69.51

TAN          66.52

GLD         42.69

Looking @ above RSI numbers, risk has increased substantially for pullbacks/ sideways move in many sectors, anything above 70 RSI is considered overbought and is taken as contrary indicator irrespective of jubilation / euphoria.

The question is are we going to fight for last $$ or book gains and wait for better RSI numbers.

Ironically Gold is looking much better based on RSI of 42.69...30 RSI is considered oversold and we are very close to it.....

BUT markets gives you a sense of " nothing can go wrong because I am so good @ making money syndrome...a sure sign of TOP....

Sentiment which is extremely bullish " always is near top " is rampant enthusiasm for everything going right for economic resurgence......

BUT a bigger question is..... are we justified in making new all time high in Nasdaq & SOX...is profit growing faster than previous high environment?

Answer is " absolutely NOT "

This is where Risk / reward ratio comes into play......

YES...market could go further UP based on new allocation to equities........

Then we are more vulnerable to a quick U turn in market.....

Hopefully we are all looking @ our exposure lot closely while going is good....a major reduction is exposure is " highly recommended "

Stay with very high comfort / high conviction stocks only.....

Good luck with your own analysis & comfort level.

BLOG does NOT give buy or sell.

Saleem

Posted in: Mixed