An overbought market is a healthy market, Bank of America strategists said in a note.
The 28-month Williams %R, a technical indicator that indicates whether an index or a stock is overbought, has been sending signals for the past four months.
This could play a crucial role in determining whether the stock market continues its strong performance into the end of the year, strategists said.
"A persistent overbought above -20 on the 28-month Williams %R is a bullish overbought for the S&P 500 (SPX)," strategists wrote in a Tuesday note.
"This longer-term price momentum indicator moved to overbought in November 2023 and stayed overbought in December, January and February."
According to BofA, a sustained overbought condition “is the key for a strong 2024.”
In years when the Williams %R was overbought, the S&P 500 “is up 100% of the time,” strategists noted, with average and median returns of 19% and 16.8%, respectively. The largest drop was 10.8%.
On the other hand, years when the S&P 500 begins overbought in January but fails to keep this status all year tend to be weaker and more unpredictable, “especially when the monthly Williams %R moves out of overbought for three months or more,” BofA wrote.
The index is up more than 7% year-to-date.