We are all Susceptible to Overthinking.

by | Dec 15, 2024 | Chart of the Week Past

In this Chart of the Week, I am using some of my post from the 12-9-24 Advisory Swing and Options Trader Letter. Each letter provides education, market and sector review, market internals, swing and options trades, and video updates.

This part of the letter I reviewed Indices, Divergences and Overthinking. 

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When we get a bearish extreme reading in our market internals, I always tell subscribers not to expect the market to correct immediately. Historically, it could begin in two days and sometimes even as long as two weeks.

It’s also mentioned that while the broader markets correct a relatively small amount, the potential for “accidents” in individual stocks (significant declines or gaps lower) increases dramatically.

The bearish extreme signal came on November 25th, and in those two weeks, the S&P 500 has continued to inch higher day by day to new all-time highs.

So, after two weeks since the signal, is the market ready to correct the advance?

Based on those new all-time highs, it may surprise you that the market has been correcting since the day after the signal. How can that be?

S&P 500 Weighted and Equality Weighted 12-9-24

The charts above display the Weighted and Equally Weighted S&P 500 ETFs.

The green arrows marking the reversal on November 19th on both the Weighted and Equally Weighted made the turn, and the Equally Weighted moved higher with tremendous momentum to a new all-time high while the Weighted did not.

The red arrow marks November 25th, the day of the bearish extreme signal.

The Weighted S&P 500 continued to advance, making new all-time highs, while the Equally Weighted moved sideways for a few days and then began to decline.

That decline continued into the end of last week while the Weighted advanced.

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Magnificent Seven MAGS and S&P 500 Equally Weighted 12-9-24

The charts above display the ETF MAGS (Magnificent Seven FANG stocks) and the S&P 500 Equally Weighted.

The green arrow marks a reversal day that occurred the Friday before last on November 29th.

The second red arrow on the equally weighted S&P 500 shows the same day.

During the time that the Equally Weighted spurted higher, MAGS continued to decline. The Magnificent Seven underperformed while others advanced.

Last week’s move higher into new all-time highs for the S&P 500 and the NASDAQ 100 was primarily about money rotating into the Magnificent Seven.

If you look at charts of the Dow, Russell 2000, Regional Banks, Transports, and other ETFs, you see that they turned lower at the internal bearish signal.

One lesson is understanding how Weighted and Equally Weighted ETFs can show how a few stocks can mask underlying weaknesses.

A significant lesson for the future is to accept that we don't know everything happening or could happen.

There will also be times when conflicting information exists, but as chartists, we must follow the patterns.

This is a lesson that I am reinforcing for myself this week and sharing with you.

You may recall that I mentioned the pattern in MAGS in last week’s video.

The FANG stocks were underperforming, and the internals signaled higher risk for longs, but the pattern in MAGS was compelling, and I knew it.

Granted, in hindsight, I could’ve bought MAGS last Monday with a stop (share-sized) under the recent Pivot Low (PL). I didn’t and missed a great opportunity.

Why didn’t I? The simple answer is overthinking.

If there is a compelling pattern, press the button. Money management will take care of failed trades. It’s okay to be wrong; it will happen.

I hope my sharing my overthinking helps you.  I know it reinforces it for me.

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