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Overbought Market? The Case for Chasing Stocks in Q4


Whether this last trading day in October sees us ending this massive monthly move with a trick or a treat, the big picture remains intact: Stocks had a historic burst higher and are now widely considered overbought. Just how much of a decline we might see, and whether the former 1250 resistance level for the S&P 500 can hold up and serve as new support will be key.

But given the amount of investor money that missed the October bounce, and with only two months left of the year, there's reason to believe that any dip will be met with buyers.

"You had a record number of managers behind the benchmarks and you just set up a recipe for a big chase, we call it a race for the roses," says Josh Brown of Fusion Analytics and founder of the blog The Reformed Broker.

What's interesting is that if you look at the S&P 500 itself, prior to the start of trading this morning, 217 members or 43% of the companies were behind the benchmark month-to-date, at least 100 were trailing by 5% or more with nearly two dozen stocks actually posting a loss for the month. For the record, the four worst performers for October are Netflix (NFLX), First Solar (FSLR), Hospira (HSP), and Sprint Nextel (S).

Meantime, we start the new week out with fresh concerns from the east, the west and within. On the eastern front, in Tokyo, we have aggressive intervention in the currency market aimed at weakening the Japanese Yen. "Japan has new finance minister every 20 minutes. For the average person, it's not something with long-term, wide-ranging, massive effect," Brown says in the attached video. But with the dollar hitting a new record low versus the yen, this move shouldn't be ignored.

On the western front, the Euro pact appears to be holding but there is concern that Italy's budget balancing act may make the fights inside the ancient Roman Coliseum look tame.

And here in the U.S., the suspension of MF Global (MF) from the New York Fed's list of 22 primary dealers raised eyebrows today, but not panic. As Brown describes it, MF is troubling but not of systemic proportions.

"It's got brokerage operations, it's pretty big in the futures markets, but for the average person, they're not racing to the branch to make sure their money is okay," he says.

So with two-thirds of Q4 still ahead of us, Brown thinks moderation is the key to success.

"There's this prevailing concept these days where it's either risk-on or risk-off and people have taken to going 100% cash or 100% long," he says. "What ends up happening is that they get whipsawed."

Brown is constructive on the market and is now looking at sentiment and seasonality, pointing out that November through December is a much better time of year to be in the markets.