'An overbought market is a healthy market': A technical indicator that's been flashing since November could hold the key to a bullish 2024

• A key long-term indicator of an overbought market has been flashing since November.
• When it flashes for 12 months, the S&P 500 is positive 100% of the time, Bank of America said.

Three months into 2024 and the stock market is off to a stellar start.

Record highs have come in bunches, and investors have clamored to participate in the artificial intelligence-driven euphoria that's powered rallies in names like Nvidia and Microsoft.

A technical indicator that signals conditions in the stock market are "overbought" — a term traders use to describe when stocks are trading above fair value — has been flashing for four months and could be pivotal to whether equities stay hot through year-end, according to Bank of America.

"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."

When the indicator flashes "overbought" for an entire calendar year, the S&P 500 is positive 100% of the time, the bank said.

In those positive instances, the S&P 500's average and median returns were 19.0% and 16.8%, respectively. At the same time, however, the average and median pullbacks those years were 6.4% and 6.9%.

On the other hand, during years when the benchmark index is overbought in January but then loses it later in the year on a monthly closing basis, markets become more "erratic" and less robust, particularly when the indicator moves out of "overbought" for three consecutive months or more.

"Staying overbought is the key for 2024," the strategists said.

Meanwhile, Bank of America's latest fund manager survey showed investors haven't been this bullish on stocks in two years, with many firms rushing into the tech trade.

And the recent strength in stocks has invited whispers of a potential bubble. Market veteran Jon Wolfenbarger, for one, has been bearish to start the year. He has warned that a deterioration in earnings is on the way and has pointed to signals similar to the early-2000s Tech Bubble.

"The market is highly vulnerable to falling to new bear market lows," Wolfenbarger wrote in a January note. "Most investors do not see this coming, as they are being misled by the persistent strength of a handful of megacap Tech stocks. They have already forgotten how much those stocks fell in 2022. We believe they will be reminded soon how much overvalued Tech stocks can fall in a recession."

The S&P 500 is up more than 7% year-to-date. After midday on Tuesday, the index hovered at 5,086.39.