S&P 500 Index Poised to Drop, Then Rebound: Technical Analysis

The rally that sent the Standard & Poor’s 500 Index to a five-year high may stall in the coming week before resuming over the next month, according to a report by Bespoke Investment Group LLC.

More than three quarters of the stocks in the U.S. equity benchmark were trading at least one standard deviation above their average prices from the past 50 days, the note said. The S&P 500 averaged a 0.6 percent decline in the following week when more than 75 percent of its companies were “overbought,” according to Bespoke. It rose by an average of 1.1 percent in the following month and 2.8 percent after three months, the research firm wrote, citing seven previous instances since 1990.

“If the trends of the last seven extreme overbought readings are any indication, the S&P 500 tends to see some short-term weakness, but then it bounces back once overbought levels are worked off,” Bespoke said in today’s note.

The S&P 500 gained 4.7 percent in January through yesterday for the best start to a year since 1997. The gauge surged to the highest level since December 2007 as companies including General Electric Co. and Goldman Sachs Group Inc. reported better-than-estimated earnings and lawmakers agreed on measures to avoid more than $600 billion in automatic spending cuts and tax increases.

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