History finds that stocks can still rise even as momentum signals suggest caution.

But this is the kind of momentum that makes some market watchers uneasy. Technically bearish traders tap their computer screens to highlight warnings flashed by their favorite momentum measure: the 14-day relative strength index, or RSI.

However, Mark Newton, head of technical strategy at Fundstrat, says that although many RSI readings are high, that does not mean stocks are currently at risk.

Before we explain Newton's thinking, let's examine the RSI a little more. A rising RSI is a positive signal for the stock, because it shows that buying momentum is rising, compared to selling. A bearish Relative Strength Index (RSI) is the opposite and is bad for those who own long stocks.

But the RSI becomes more useful as a short-term contrarian indicator at extremes. If the RSI rises too high, this indicates that the market is too excited and there may be a reversal. The overbought threshold for the RSI is placed at 70, according to most market technicians. The RSI is in the oversold zone below 30.

It should be noted that not all RSI are created equal. One difference is that small-cap stocks (which are more likely to be herded by retail investors) that also have a high beta (usually moving more than the underlying market) can more easily hit RSI extremes.

Newton points out another difference: that the overbought zone varies between the daily, weekly, and monthly charts. Short-term traders may claim that markets or individual stocks are overbought when daily indicators such as the traditional 14-day RSI move above 70. Long-term investors may focus on the weekly and/or monthly RSI.

In essence, Newton shows in the table below that a pullback in members of the S&P 500 for example because the daily RSI becomes overbought is likely to be short-lived and that the uptrend can then resume.

“Over three, six and 12 months, when SPX components rose more than 70%, the gains largely mirrored the percentages when the RSI is below 70. Thus, overbought, in and of itself, does not appear to be an obstacle to achieving “More gains,” Newton says.

The good news for traders tracking indices is that neither the Nasdaq Composite at 62.6 nor the S&P 500 at 66.9 have the RSI in overbought territory. Germany's DAX (DX:DAX) at 77.6 and Japan's Nikkei 225 (JP:NIK) at 81.2 look vulnerable to a pullback at least in the short term.

To show how useful the RSI is as a short-term contrarian indicator, consider the Super Micro Computer SMCI,
+6.07%.
Fueled by the AI-related frenzy and options buying by the Wallstreetbets crowd, shares in the computer server provider rose above $1,000 on February 16, pushing its RSI over 98. Buying at such an extreme level of overbought was a Very bad. It moved that day with shares ending the session down about 25% from the peak.

Markets

US stock index futures ES00,
-0.06%

YM00,
-0.10%

NQ00,
+0.05%
Slightly lower as benchmark Treasury bond yields BX:TMUBMUSD10Y decline. There was little change in the dollar DXY, while oil prices rose CL.1.
+1.60%
rise and gold gc00,
+0.48%
It trades at around $2,050 an ounce.

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Buzz

US economic data scheduled for release on Friday includes the final S&P manufacturing index reading for February at 9:45 a.m. ET. Then, at 10 a.m., the February ISM Manufacturing, January Construction Spending, and February Consumer Confidence reports will be released.

Fed officials who made comments included Dallas Fed President Lori Logan at 10:15 a.m., Fed Governor Chris Waller, also at 10:15 a.m., and Atlanta Fed President Raphael Bostic at 12: 15 p.m., and San Francisco Fed President Mary Daly at 1:30. p.m., and Fed Governor Adriana Kugler at 3:30 p.m

Elon Musk has filed a lawsuit against OpenAI and its CEO Sam Altman, alleging that the ChatGPT maker's alliance with Microsoft MSFT,
+1.45%
It weakened the startup's original mission of building artificial intelligence systems for the benefit of humanity.

Stock in New York Community Bank NYCB,
+5.51%
It fell 27% in pre-market trading on Friday after replacing its CEO and reporting weaknesses in its accounting protocols.

Ntab Ntab,
+1.24%
Stock jumps 17% after data storage group issues strong 2024 guidance, while well-received earnings lift Autodesk ADSK,
+1.14%
Stocks 9%.

Manufacturing in China contracted for the fifth straight month in February, according to an official survey of factory managers.

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Chart

Dollar and Euro EURUSD,
+0.12%
It has moved within a fairly narrow range between $1.07 and $1.10 for most of this year. Société Générale's Kit Jukes explains why. “The foreign exchange market thrives on differences – in growth, balance of payments, policy, inflation, but most of all, monetary policy,” he says. Policy is expressed through short-term bond yields and the chart shows that German two-year bond yields BX:TMBMKDE-02Y are tracking two-year Treasuries BX:TMUBMUSD02Y “to an unprecedented degree.”

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