The S&P 500 may be trading just under its all-time highs, but a look at a one-year chart for the index shows that recently it hasn’t done much of anything. As shown in the chart below, the S&P 500 is essentially at the same level it was at nearly three months ago in late January.
The S&P 500 has become so range-bound that the standard deviation of the index’s closing prices over the last 50-trading days (measure of volatility) recently dropped below 1% of the index’s 50-day moving average. Prior to the most recent period, the last time we saw the index’s standard deviation over the prior 50 trading days drop below 1% of the index’s 50-day moving average was one year ago back in May 2014. Before that, however, you have to go all the way back to July 2007 to find a period where this measure of volatility was as low as it currently is. The chart below shows the S&P 500 going back to 1995. In it, each period where the standard deviation of prices relative to the 50-day moving average dropped below 1% is marked in red. As shown, this type of range-bound market is really uncommon. Outside of the two periods of occurrences in the last year, the only other times that we saw this was in 1995, and then at various points between late 2005 and mid 2007.
It is not uncommon for periods of range bound trading to be followed by a big break in the market as the pendulum swings from one extreme to the other. The big question is which way? Unfortunately, these prior occurrences don’t provide much insight into that answer. In 1995, the market kept going along on its merry way, while in the last decade, the market ultimately broke down hard after multiple periods of range bound trading.