AN AMAZING FLIGHT INTO STOCKS

With the stock market up five out of the last five days and wonderful earnings reports flooding the headlines, it's easy to call the market overbought and place bets against the crowd.

The potential pitfall with betting against an overbought market, however, is that overbought markets can stay overbought for a long time. For proof, we present the past year's trading in the benchmark S&P 500.

You'll notice an extra window below today's chart. This window displays an indicator called "RSI." RSI is an "overbought/oversold" gauge. You can think of it like a rubber band. When the RSI rubber band stretches above 70, an asset is overbought and likely to take a breather to the downside. When the RSI rubber band stretches below 30, the asset is oversold and likely to rebound. We used this idea to identify a terrific gold stock trade a few months ago.

For the past year, an overbought reading of 70 was a great indicator the stock market was due for a correction. These readings, and the corrections that followed, are marked with red arrows. Now have a look at the current overbought nature of the market. Last month, the market entered an overbought condition… and has climbed higher and higher to remain in that condition. It's an amazing flight into stocks.