Are stocks telling us a pullback is ahead?

Thanksgiving week normally sees stock trading volume drop precipitously the closer you get to the holiday and modest changes at best the day after a day off. 

But markets still pulsed with lots of trading on both Nov. 21 and Nov. 22, with key stocks including Microsoft  (MSFT) - Get Free Report, Amazon.com  (AMZN) - Get Free Report, Adobe Systems  (ADBE) - Get Free Report, and Facebook parent Meta Platforms  (META) - Get Free Report hitting 52-week highs on Wednesday.

When trading closed on Nov. 22, the S&P 500 Index had risen 11% from its Oct. 27 low of 4,104, and an important measure of momentum, its relative strength index, had hit 71.3.

A reading above 70 suggests the index (or a stock, for that matter) is overbought and could pull back. 

The Nasdaq Composite Index  (^COMPX) - Get Free Report hit an RSI of nearly 72 on Tuesday. The RSI for the Nasdaq-100 Index topped 72 on Nov. 20 as traders struggled to decide how to play the battle for control of artificial intelligence. 

The RSI for the Dow Jones Industrial Average  (^DJI) - Get Free Report finished at 71.2, largely because Microsoft hit a new 52-week high of 379.79.   The average was up 185 points, or 0.5%. 

Does that really mean a pullback is coming? The rule of thumb on RSIs is that moving above 70 is a warning. Above 75 is a likelihood. Above 80 signals a selloff is coming within a very few days.

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When RSIs drop under 30, stocks are oversold with 25 meaning a rally is coming soon. At 20, the rally is primed to start.  (You can find RSI levels on big investing sites and many brokerage and mutual fund sites.)

Who makes these decisions under these scenarios is probably not human. All the trading houses, money management giants and the like have computers set to react immediately to various inputs, including RSI levels.  

What happens after the selloff in October

The Nasdaq-100 Index's RSI hit 76 in mid-July. A nasty correction erupted at the end of the month and didn't bottom until the end of October. 

When the bottom arrived, the jumps for many stocks were immediate, Consider what happened to the the magnificent seven group of tech stocks after hitting their lows in October.

• Apple  (AAPL) - Get Free Report: Up 15.5%. 
• Amazon.com: Up 18.3%. 
• Google parent Alphabet  (GOOGL) - Get Free Report: Up 15.2%. 
• Facebook parent Meta Platforms: Up 22.2%.
• Microsoft: Up 16.5%. 
• Nvidia  (NVDA) - Get Free Report: Up 24.2%.
• Tesla  (TSLA) - Get Free Report: Up 15.7%. 

Stocks were soaring into November 2021 when the Federal Reserve announced inflation was getting out of control and would be attacked aggressively. The RSIs for all the major averages were hitting in the high 70s. 

The slump lasted just about all of 2022. 

How much of a pullback that could occur right now might be modest. The RSI data so far is not yet extreme. 

Plus, stocks and bonds are sensitive to where prices stand, interest rates in general and bond yields in particular, economic trends, geopolitical realities. 

Many market analysts see stocks rising into the new year. But, because of the gains since October, the gains between now and Dec. 31 may be modest. 

A pullback, in other words, is not the end of the world. It may be a good time to watch carefully and look for bargains.