The chart below shows the percentage of stocks in the S&P 500 trading at overbought (red line) and oversold (green line) levels. It comes from our daily Morning Lineup report which is available to all Bespoke Premium subscribers. For the purpose of this analysis, a stock is oversold when it is trading one or more standard deviations below its 50-day moving average (DMA), and it is overbought when it is trading one or more standard deviations above its 50-DMA.
Following Tuesday's rally, 54.2% of stocks in the S&P 500 are overbought, while just 4.2% of the stocks in the index are oversold. On a net basis, this works out to 50% of the stocks in the index, and it is the highest level in three months (9/19/12). While 54.2% seems like a high pecentage of overbought stocks, in prior rallies this year, the percentage of overbought stocks in the S&P 500 got as high as 69% before the market retreated.