Sunday, May 10, 2015

S&P 500: A Pause That Refreshes, Or Is the Top In?

The current rally has reached extremes: more than three years above the neutral line of MACD and almost 500 points above the 200-week moving average.

U.S stocks have been treading water for a while, and this raises a question: is this just another pause that refreshes a market on its way to new highs, or is the top in? Nobody knows, of course, but a chart of the S&P 500 (SPX) that includes the previous tops in 2000 and 2008 offers some useful context.

I've marked three items of interest: the length of time the SPX spent above the zero line of MACD, the point spread from the 200-week moving average (MA) to the peak, and the longer-term trend in RSI (relative strength).

The current rally has spend more than three years above the neutral line of MACD, i.e. in bullish territory. The only comparable length of time without a dip below the zero line of MACD (which reflects a significant correction) was the Great Bull Market of 1995-2000, which was interrupted briefly by the Asian Contagion in 1998.

According to CNBC, the current rally has run more than 1,370 days without a 10% correction, making it the 3rd-longest Bull Market in history.

The SPX could drop 150 points (roughly 7%) and still be about 350 points above its 200-week MA--the same extreme reached in the blow-off top of 2000.

In terms of points above the 200-week moving average at peaks, the current rally has blown past previous bullish extremes. In round numbers, the current rally is very nearly 500 points above the 200-week MA, far exceeding the point spread reached at previous tops: about 350 in 2000, and around 250 in 2007-08.

The third item of interest is the declining trend of RSI. RSI bounces around quite a bit on this time-frame, but it is noteworthy that similar downtrends did not correspond to bull market advances. Rather, they align with market tops followed by declines.

Maybe the SPX will noodle around for some time in a pause that refreshes the Bulls, or maybe it continues tracing out a top. Either way, the extremes in time duration and points above the 200-week MA are noteworthy. Can this 6-year rally extend even further above previous extremes? if so, for how long? Or is the market due for trip below the zero line of MACD, or perhaps a visit to the 200-week MA around 1,630?

A 480-point drop is currently deemed impossible; but then 480-point declines are always "impossible," yet they happen despite this presumed impossibility. 

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