The past couple of months in the investment world have been akin to trying to defy the laws of physics.
Picture this: attempting to hold a beach ball underwater, only for it to shoot up with great force when released. This is how stocks have behaved recently. They were so beaten down and feared that they had to bounce back hard.
It’s no surprise that all the losses from September through October have reversed, with the Dow and Nasdaq closing at record highs. However, as the laws of physics dictate, what goes up must come down.
A market pause is likely, and perhaps even overdue, as reflected in the late-afternoon market dump on Wednesday. But not all sectors are following this trend. One market, which we’ll discuss later, is finding its footing and could be a big moneymaker next year.
Before we delve into that, let’s address the “overbought” situation. There are many ways to check for overbought conditions, and it’s crucial to look from multiple angles.
For instance, the Relative Strength Index (RSI) shows that we’ve reached the most overbought level in over three years. However, this is only one perspective.
When we take a longer-term view using weekly charts, we see a different picture. From this perspective, stocks haven’t even entered overbought territory yet. While stocks have a tendency to back down from overbought conditions on this timeframe, it’s not always the case. On a longer-term basis, the recent gains in stocks are not too out of the ordinary, suggesting that conditions could stay relatively overbought for some time.
In other news, oil prices are on the rise again, thanks to an attack on several vessels in the Red Sea by Iran-aligned Houthi militants. This disruption in shipping routes led to oil and gas giant BP suspending all operations in the area, driving oil prices 2% higher this week. This event underscores the volatility of the global energy trade under wartime conditions.
Despite this, energy stocks remain among the cheapest and most disliked in the market, making them attractive to contrarian speculators and value investors. I remain bullish on oil and have added to my favorite energy holdings to balance the riskier growth side of my portfolio.
Let us know what you think, please share your thoughts in the comments below.
