The chart below is from today’s Morning Lineup, and shows where the S&P 500 is trading relative to its trading range. When the blue line is in the red zones, it indicates that the S&P 500 is trading at short-term overbought levels (pink=between one and two standard deviations above the 50-day moving average (DMA), while dark red = S&P 500 is more than two standard deviations above its 50-DMA). Conversely, when the line is in the green zones, the market is short-term oversold (light green=between one and two standard deviations below the 50-DMA, while dark green = S&P 500 is more than two standard deviations below its 50-DMA). After reaching levels well into ‘extreme’ overbought territory in the last few weeks, the S&P 500 has been working its way down to less overbought levels as the market trades sideways and its moving averages and trading ranges play catch up. As of mid-day today, the S&P 500 is still trading at short-term overbought levels, but the degree to which it is overbought is the lowest in a month. While this doesn’t suggest that the market is trading at attractive levels from a timing perspective, it illustrates a fact that we have cited numerous times in the past and that is that just because a market is overbought doesn’t necessarily mean that it has to sell-off in order to work off the overbought condition. Corrections can occur in both price and time.
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