Study: what happens when the S&P 500 is far above its 200 sma


The S&P 500 is more than 10% above its 200 daily moving average. This is the first time this signal came out in 4 years!
Here are the historical cases when

  1. The S&P was more than 10% above its 200 sma, and…
  2. The S&P was making a new all time high, and…
  3. This was the first time this signal came out in more than 2 years.

Here’s the data in Excel

Historical Cases

  1. October 4, 1950
  2. April 8, 1954
  3. September 24, 1958
  4. May 4, 1967
  5. July 17, 1980
  6. May 3, 1995
  7. April 11, 2013
  8. January 5, 2018 (present case)

October 4, 1950

The S&P began a 6.4% “small correction” 1.5 months later in late-November. The S&P did not make a significant correction over the next 12 months.

April 8, 1954

The S&P 500 rallied nonstop. It did not make a 6%+ “small correction” until March 1955!

September 24, 1958

The S&P rallied for another 10 months before beginning a “significant correction” in August 1959.

May 4, 1967

The S&P began an 8.4% “small correction” 1 month later.

July 17, 1980

The S&P began a “significant correction” 4 months later in November 1980.

May 3, 1995

The S&P 500 rallied nonstop for 9 months and did not make a 6%+ “small correction” until February 1996. That correction was exactly 6%.

April 11, 2013

The S&P began a 7.5% “small correction” 1.5 months later.

Conclusion

  1. When this signal came out, the S&P rallied at least another 1-1.5 months before making a small correction. This is logical. When the S&P rallies like crazy for the first time in years, its weekly and monthly momentum (RSI) will be extremely high. Extremely high momentum typically needs a bearish divergence before the market can break down.
  2. The S&P 500 rallied at least another 4 months before beginning a “significant correction” as defined by our Medium-Long Term Model.

See more studies:

  1. What happens when RSI > 80 on every single time frame.
  2. Stock market volatility will rise in 2018

8 comments add yours

  1. Hi, I’m brand new to your site and am highly enjoying it. You market insight is extremely useful. I just wanted to drop you a note saying thank you for all of your content!
    Regards – Happy trading!

    • Hi Cory,
      Thank you for reading, and I’m glad you enjoy the insights.
      Kind regards,
      Troy

  2. Great work. Question: weren’t all these criteria met much earlier? Sometime last year, November or December? Because, if so, then we’re much further past the tipping point. Thanks.

  3. Troy, there is no rsi in any of the above research, example: price making new highs with divergence lower highs in rsi. This could be useful for detecting the next 6% correction if we were able to see how many weekly candles diverged from the rsi. Looking at the current weekly spx chart, it looks like it needs to catch up with the parabolic candles of the daily, meaning that the weekly chart needs another 4 parabolic green candles with lower diverging highs in rsi before all shorts & new money inflows are exhausted.

  4. Hi Troy,
    Fascinating article, I’ve been following your previous articles about a good pullback this year and with those in mind and this information, do you feel that the 10% pull back the SP500 will experience is due to happen at end of February to mid-March?
    Always enjoy reading your articles.

    • Yes JP, that is the most likely scenario. Tomorrow’s post will shed more light on that topic.
      Kind regards,
      Troy

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