Us Markets Rally Despite Being Overbought

I was holding onto Short S&P 500 Proshares (SH) shares last week and until today feeling there would be a leg down before a bottom formation was created. But the action today with a strong run at the end of the day even with the markets already overbought, changed my mind and I got rid of the SH shares. A housing report and a strong financial rally led to the optimistic day.

Housing Gets a Lift

Housing starts rose in February as builders increased inventory despite record home foreclosures in certain areas. The Nasdaq rallied on the day 4% while the S&P 500 moved higher by 3.2% and the Dow Jones Industrial Average moved higher 2.48%. Strong technology buying included beaten down semiconductor names giving more evidence of a turnaround in the economy.

Financials Again Gain Ground

Financial stocks began the rally last week with Citigroup claiming profitable months in early 2009 along with several other large banks. Today JP Morgan Chase (JPM) rose nearly 9% while Wells Fargo & Co, Bank of America, and Citigroup Inc all moved higher.

Look For A Complete Bottom

I am going to be cautious and continue to look for a slight dip in the markets before a rally to a new monthly high, creating a 'W' shaped bottom. At that point building small positions in the best names in the best industries will be important. Having downside protection will also be a consideration as the markets could reverse quickly and move lower like we saw in the first month of the year.