How Overextended is the SP500 Right Now in June?

Jun 10, 2014: 2:01 PM CST

I wanted to take a quick look at the current strong rally and objectively compare the degree the market is overextended now and how that compares with the past (particularly the 1999 rally).

Let’s take a look at two S&P 500 Charts and plot the ‘overbought’ distance from trending moving averages.

We’ll start with the Monthly Chart:

The last time we saw a straight-up multi-month (in fact, multi-year rally) was the 1,995 to 2,000 period during the economic expansion and run-up to the Tech Bubble burst.

We saw a persistent multi-year rally – to a lesser extent – from 2003 to 2007’s peak.

The current bull market (starting March 2009) has lasted just over five years as we march through June 2014.

It’s one thing to say “the market is really overextended” but it’s another to quantify “overextended” and compare current readings to those of recent history.

I chose to compare the current monthly closing price (for each bar) with the percent (red line) and index value (blue line) of the 20 month Simple Moving Average.

The chart shows that the most overextended reading of the Percent (red)  bars came during the 1997 into 1,998 straight-up rally from the 900 to 1,200 index value when the S&P 500 stretched 31% above the rising 20 month SMA.

Or current reading is less than the 25% to 30% over-extension – it’s currently registering a 14.77% over-extension.

It’s important to compare the percentage difference because the pure-price value is actually higher now than in 2,000 but the index is also at higher levels than the 2000 peak.

The S&P 500 remained roughly 250 index points extended above the rising 20 month SMA during the prior Bull Market and currently recorded the highest value of 299 in December 2013.

While the S&P 500 did recently register an “all time high” over-extended price value, the index is currently half as overextended as the highest values during the late 1,990’s Bull Market.

Finally, we can view even more recent history using a Daily Chart and the 200 day SMA:

The S&P 500 broke powerfully and impulsively above the 1,900 index level to thrust the market roughly 11 days straight up in short-squeezed breakout mode.

Did that take the index to its greatest extension from the rising 200 day SMA?

Actually no – and in fact, we’ve seen many higher peaks than this during the entirety of the 2009 to present Bull Market.

For example, the greatest extension (not including the 2009 initial breakout/reversal) occurred during February 2011 with a 13% extension above the rising 200 day SMA (which was a 177 point extension).

Each progressive price peak – and over-extension – occurred at lower percentage and price extensions from the 200 day SMA.

Our current impulsive breakout market is “only” 7.86% extended which is a stellar 142 index point extension.

In other words, despite the impressive strength of our current rally into June, it’s neither the most extended on a monthly basis (compared to the 1990’s bull) nor a daily basis.

That’s certainly not to say the rally is impressive – just not the ‘most’ impressive rally we’ve ever seen.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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