Key Point:
Given that the SPX is coming off the best weekly gain in over a year, it’s not outlandish to call this market short-term stretched. Seeing some consolidation soon would help new patterns to take shape. Below are a few charts showing how far last week’s big reaction has taken the SPX the last few days and what it could mean going forward.
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Intra-Day
The SPX squeaked out a 10-bps gain on Tuesday to log its fifth straight advance. This now is the longest since seven-straight from 9/9 – 9/17. With the bond market closed yesterday and no new data being released, the fireworks were minimal, at least within the major indices.
Short-term RSI
It seems like a long time ago now, but we’ll recall that the SPX ended October with a harsh 1.9% decline. That was one of the worst losses of 2024 and flipped the monthly performance from positive to negative. But it didn’t persist.
And now the SPX is up over 5.5% since that October 31st intra-day low point, which quickly pulled the 14-period RSI on the two-hour chart from oversold to overbought territory. The indicator has been above 70 for three days, which has been a fairly long stay over the last 12 months.
We’ve displayed this chart dozens of times over the last year, and what it really shows is the ebb and flow of an uptrend. At times, the SPX has gotten overheated (like now) and needs to regroup. No one would deny that a breather would be welcome. In fact, said breather may already have started with gains of just 40bps and 10bps the last two days.
Short-term Trading Channel
Yesterday we discussed how the SPX ended last week once again above its two-year trading channel. It’s now near the upper edge of a THREE-MONTH trading channel, too.
Again, an ensuing big decline is not a guarantee just because it’s near this line – nor is it a necessity. But seeing the index simply repeat last week’s pace and shoot way above the upper threshold without a break would be surprising.
SPX vs. 20-Day Moving Average
Last week’s pop pulled the SPX back above its 20-day moving average, which is a bullish development. During the best trading environments, the index trades above the short-term line the majority of the time, with downside breaks being temporary. That proved to be the case again this time.
The snap back now has put the SPX nearly 3% above the 20-day line, which is among the biggest discrepancies in 2024. This can be normalized through price or time: 1-a sizable decline clearly would do the trick or 2-as just discussed above, an innocuous pause soon would allow the 20-DMA to catch up to the index, as well.
Overbought S&P 500 Stocks
Despite these short-term metrics being stretched, the SPX’s 14-day RSI still isn’t officially overbought: it’s close at 69.16.
But many of its components are…. According to finviz.com, 112/503 have RSI readings above 70 (22%). Technology has the most with 28, while Comm Service has the greatest percentage of overbought holdings with 33%.
We’re the first to admit that being overbought is NOT bearish, and when the number of overbought stocks gets this high, it reveals how strong the foundation has gotten. But it also tells us that short-term momentum could be due for a slowdown.
