OBOSS Market Timing 05/10/13 ‘OBOSS at 2.51’

OBOSS closed the week in extreme overbought territory.  This may have been a gift week where investors were able to reposition themselves to reduce direction risk while the market flashed several warning signs without going into a correction.

I received several questions about how quickly an investor should react to OBOSS alerts.  It’s very difficult to time a top or a bottom in the market no matter what indicator you use, but OBOSS does gives advanced warnings when the market gets too far extended on one side or the other.  Typically it takes one to two weeks from the first OBOSS alert before the eventual change in trend, but it is always wise to consider repositioning your portfolio to be ready for the change in trend on the first alert in case there is a sudden shift in sentiment.  When OBOSS gets too extremely overbought we start protecting profits by setting stops, decreasing our directional exposure by removing positive Deltas, and reducing market exposure by slowly scaling out of positions on moves higher.  Shifting portfolios to be more defensive takes time so it is a good thing when OBOSS generates an extreme overbought reading and the markets continue to push higher allowing investors to reposition successfully.

The last time OBOSS was this extreme was the week of May 18, 2012.  Last May we watched OBOSS hold in extreme territory for over a week before the markets shifted from a downward bias to a very strong uptrend two weeks later.  We started positioning ourselves for the change in trend right away by finding buying opportunities, scaling into high quality stocks on the dips, and increasing our positive Deltas.  In other words, we increased our exposure to the markets on every dip from the first OBOSS alert until we were fully positioned for the ensuing uptrend.

OBOSS levels higher than 2.5 is a very good indication of an impending pullback in prices.  This is a good time to reduce risk, close margin, and take profits by scaling out on moves higher.

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