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S&P 500: Extremely overbought conditions to trigger choppy trading

S&P 500: Extremely overbought conditions to trigger choppy trading

Heightened complacency could breed risks for the S&P 500 with no shortage of potential negative catalysts.

 

Key quotes 

“With only one exception in the post-WWII period, bear markets typically started in advance of recessions’ start dates; while bear markets typically ended in advance of recessions’ end dates. With the exception of 2001, when the recession ended, but the stock market didn’t bottom until the end of 2002, bear markets ended while the economic data remained in the dumpster.”

“The cumulative advance/decline (A/D) line for the S&P 500 has been catching up to the rally in the stock market over the past couple of weeks. As such, more than 95% of stocks in the S&P 500 are now trading above their 50-day moving averages; although less than 50% are trading above their 200-day moving averages.” 

 

“The parabolic move up in stocks trading above their 50-day moving averages points to extremely overbought conditions; even if surges like this historically were longer-term positives. Similar surges occurred off the 1991, 2003, 2009 and 2016 market lows; and were generally followed by a few months of choppy/consolidative action, before stocks resumed their ascent.” 

“One of my concerns is investor complacency—bred from stocks’ rocket launch off the lows. There is no shortage of catalysts for a consolidation and/or a period of heightened volatility; including second waves of the virus, second-order/lasting economic effects of the shutdown, simmering tensions between the United States and China, budding election uncertainty, and of course civil unrest on the heels of the death of George Floyd.”

 

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