Technically Speaking: S&P 500’s Charts and Seasonality Signaling a Break
We’re starting to see a shift in the momentum of the market as the S&P 500 and other major indices are consolidating after a strong beginning of the year may have some traders looking to lock in profits ahead of what has become a seasonally weak week of trading.
To date, the S&P 500 is up almost five percent from the December 31 close as better-than-expected economic data here in the United States has helped fuel some optimism from investors while the news from Europe has been less urgent as Greece continues to work to avoid what could be the first default among the EU countries.
Putting the strong performance aside, the SPX has now hit what would be a natural resting place as the benchmark index moved above the psychologically significant 1,300 level last week. Typically, crosses above round-numbered levels like this serve as a convenient checkpoint for investors that can cause them to take profits, especially when the level of uncertainty in the market is high, as it is now. The simple rule here is the more zeros the more potential resistance.
I mentioned the seasonally weak week above so let’s look at this phenomenon that may take hold of the market this week. In reviewing the S&P’s performance in comparison to historical averages an interesting trend in the weekly SPX performance surfaced. Looking at the weekly performance for the S&P 500 since 1950, the index posts positive returns an average of 57% of the time through the first five weeks of the year. Over that time period, the least successful week of the year is the fourth which is only positive 52% of the time. These figures support the strong January seasonality that we are all accustomed to, but there’s a twist.
When the look back period is shortened to the last twenty years (since 1990) the results change dramatically. Since 1990, the fourth week of the year posts positive returns only 39% of the time highlighted in red in the table below). Looking closely at the performance of those fourth week returns reveals that when the market is lower for the fourth week it’s typically down an average of -2.2 percent.
In addition to the weekly seasonality, the S&P 500 and other indices are teetering on technically overbought situations, as indicated by their respective short-term Relative Strength Index readings. The current RSI for the SPX is slightly higher than 70, a reading that the indicator has only seen a total of four times over the last year (indicated in the chart below).
The previous three instances of overbought conditions for the S&P 500 resulted in drops of the index by an average of 3.5% in a matter of days.
It appears that the market is sending a clear signal that the time to buy has passed, at least from the short-term perspective. Looking over the next few weeks, I’m expecting the market to pull back as short-term traders are likely to book some profits. The short-term selling pressure will likely give way to another buying opportunity as a large amount of sideline cash remains idle in money markets.
Barring a near-term meltdown in equities, this sideline money will start finding its way back into stocks as the fundamental picture continues to improve for our domestic markets.
