Stock Market Overbought or Oversold? Don't Kid Yourself!

I have heard people refer to the market being "overbought" or "oversold" for as long as I have been a student of the markets. To be sure, only one of the two terms has any credibility and that is oversold. There is one case for this, and that is when the market is trading at zero. That is oversold! It is the only real case. Since the market (S&P 500) is trading at 1270 as I write this, I guess that isn't likely to occur today (or at any time in the near future for that matter).

Unfortunately, for those who wish to use the term "overbought", it is important to note that the market has unlimited upside potential. So this case can never really occur. So there is no such thing as overbought at all.

I suppose people mean some kind of relative term when they speak in this way. In this manner, "overbought" translates to the market is high (higher than it was before). "Oversold" would translate to mean it is lower than it was before. Since the market alternates in a range a huge percentage of the time, one would conclude that such terms are even more un- meaningful than would otherwise have been the case. Let's look at it from the other side of the coin. For 1990-2000 the market remained overbought for a period of about ten years. I suppose there were occurrences within the minutia that could have been relatively higher or lower compared to the past, but what is the use of a term that draws your attention to the obvious. That's why I decided to coin a couple new terms, to put a new perspective on the whole thing.

This is really quite exciting. A revolutionary new concept. My new terms (and feel free to use them widely to get the buzz going) are "Underbought" and "Undersold."

Yes, I know, undersold is already in use. Well, not in this proprietary sense in which I intend its important new meaning. You see, "undersold" is the opposite of "underbought."

So what is this "Underbought?" Quite simply, it is when the market has not raised enough to be where it will be in the future. This means "undersold" occurs when the market has not declined enough to be where it will be at in the future. So these important key terms carry a whole different kind of meaning to their (rather meaningless) counterparts "overbought" and "oversold."

You see, "overbought" and "oversold" look at the past to decide where you are now. But underbought and undersold, look to the future to tell you where you ought to be. This is a huge difference! This is especially true since it is only the future price (with respect to where we are now, or have entered the market) that has any meaningful value to us at all!

I want to start a movement of future looking market participants that don't dwell on the past. Let's get over it and move on. The fact is the most successful investors in the world are forward looking market participants. They trade developing trends in the markets. They are anticipatory investors.

This means that most people who are not successful in the markets spend their time oriented to the past. Conducting "backtests" of data to see how the future will be. Ouch. So I vow today to never say "overbought" or "oversold" again and give myself to the infinite future that stands before me. Its "underbought" and "undersold" from here on out baby! Please join me in the revolution to make these important new trading terms a solid reality!