Commentary

The S&P 500 (SPY) is soaring high since its impressive breakout two weeks ago.

The S&P 500 (SPY) is holding onto significant moment since its last breakout: the upper-Bollinger Bands (BBs) define the latest uptrend.

The Nasdaq and PowerShares QQQ ETF (QQQ) have charts very similar to the S&P 500. Unfortunately, the stall of the last two trading days happened to occur right at the edge of the overbought threshold. AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs), closed at 68.2% on Wednesday, June 19th. AT40 got as high as 68.9% the next day. On Friday, AT40 closed at 64.0%. This fade from the 70% overbought threshold counts as a bearish signal.

After dipping in and out of overbought in December and January, AT40 (T2108) has struggled to regain such lofty heights.

For some context, AT40 last faded from overbought on April 26th. In three weeks, my favorite technical indicator plunged as low as 32.8%. The good news: the S&P 500 stayed remarkably resilient over this period. The index actually drifted slightly HIGHER over this time until, all at once, the pent-up selling pressure unleashed in one day. On May 17th, the S&P 500 knifed through 50DMA support in a move that forced me to downgrade my short-term trading call to neutral (but I was NOT bearish). The plunge turned out to be a speed bump on the road of resilience. The S&P 500 turned right around from there and rallied nearly straight up until time approached for the next Fed meeting.

Every AT40 bearish divergence seems to unfold slightly differently – with some divergences skirting the edge of bearishness – but the prospect of some kind of selling event for this divergence seems quite palpable. For example, inspired by a StockTwits poster, I created these relative performance charts of the S&P 500 that includes bands for one and two standard deviations.

The year-to-date performance of the S&P 500 (SPY) in 2017 is well above average but well within one standard deviation of performance.

If the average year-to-date performance holds, then the S&P 500 (SPY) has seen its best performance of the year and at best will stall out for the next few months.

Source for Data: Yahoo Finance

I was greatly intrigued to see that the S&P 500’s average year-to-date (YTD) performance since 1951 completely flattens out from around now until the 210th trading day (which is right around late October or early November). After that, the S&P 500’s YTD performance soars. However, on average, the S&P 500 soars to an annual performance right around the S&P 500’s current performance just seven months into the year. So, if we think averages, we cannot expect much better from the S&P 500 for the rest of the year. If we think seasonality, the S&P 500 should stall out for the next 3 or so months. If we think a range of “reasonable” outcomes, the S&P 500 is not doing anything unusual at all. Performance within plus or minus one standard deviation covers about 68% of all outcomes. Performance within plus or minus two standard deviations covers about 95% of all outcomes. Note well that these are approximations since the S&P 500’s performance is NOT normally distributed and as a skew to to the downside.