Below is a quick snapshot of the S&P 500 run through our trading range chart. After trading overbought for four consecutive months and then going parabolic in January, the S&P has been re-introduced to the concept of “mean reversion.”
One benefit of the mean reversion is that valuations have fallen quite dramatically in the span of less than two weeks. As shown below, the S&P 500’s trailing 12-month P/E ratio had stretched above 23 at the end of January, but it now sits below 22 at 21.74. As long as earnings (the “E” in P/E) remain strong, any price decline in the S&P will cause further declines in the P/E.