S&P 500: You Don’t See This Very Often

The chart below shows the S&P 500’s price relative to its 50-day moving average (DMA) expressed in standard deviations. When the line is in the white areas, the S&P 500 is trading at neutral levels. Readings in the light red (or light green) areas are considered overbought (or oversold), while readings in the dark red (or dark green) are considered extremely overbought (or oversold). Yesterday, we tweeted the chart out calling it El Capitan after the rock formation in Yosemite National Park, but a more apt Yosemite analogy after today may be Yosemite Falls.

The types of move that we have seen over the last two weeks in the S&P 500’s trading range aren’t seen too often.In the span of two weeks, the S&P 500 has gone from an extreme overbought reading to an extreme oversold reading (as of Friday afternoon). While that could change depending on where the S&P 500 settles at the end of the day, at the very least, we have seen the S&P 500 shift from extremely overbought as of 1/26 to an oversold level as of yesterday.

What makes the move that we have seen over the last two weeks even more dramatic is the fact that leading up to it there had been only two other trading days over the last year where the S&P 500 even traded at oversold levels in the past year! Whether you want to call it a slap in the face, a reality check, or something else, investors have been quickly reminded of the fact that equities move in both directions.

Following this move where the rubber band has gone from being stretched in one direction to another, we wondered whether it tends to snap back again or just snap. To that end, on page two we have provided a list of prior periods in the S&P 500’s history where the index has gone from trading at extreme overbought levels to oversold or extreme oversold levels in the span of two weeks or less.