S&P 500 Overbought, Not Overwhelmed as Bulls Shrug Off Charts

  • Spread between S&P 500 and 200-DMA widest since July 2014
  • Multiple measures of market worry stay low relative to history

The S&P 500 Index hasn’t been this overextended in 2 1/2 years, according to one technical measure, yet investors are showing few signs of worry. Hedging costs are near the lowest since July 2014, the options market has seen record call volume, and short interest sits below its one-year average.

“Overbought doesn’t mean over,” MKM Partners technical analyst Jonathan Krinsky wrote in a Dec. 11 note. “It is hard not to be the contrarian here. Yet history suggests that in strong uptrends, extreme overbought conditions and bullish sentiment are not always sell signals. Both can remain that way for months, if not quarters, before a meaningful top.”

The spread between the S&P 500 and its 200-day moving average is the widest since July 2014. Still, while stocks have climbed 6 percent since the election, the index won’t be in an “extreme overbought condition” until it’s 12 to 14 percent above the moving average, analysts Chris Verrone and Todd Sohn of Strategas Technical Research said in a Dec. 13 client note.

The S&P 500 was 6.8 percent above the 200-day moving average as of 10:54 a.m. in New York. In order to climb 12 to 14 percent above the measure, the S&P 500 would have to enter a range between 2,377.36 and 2,419.71.

Here’s how U.S. equity indexes performed in the months following the last time the S&P 500 was so high versus the 200-day, on July 3, 2014:

  • S&P 500 declined 3 percent in next 30 trading days; Russell 2000 Index slipped 7.7 percent; Nasdaq Composite Index fell 3 percent
  • S&P 500 decreased 0.9 percent in the next 3 months; Russell 2000 lost 8.6 percent; Nasdaq slid 0.2 percent
  • S&P 500 increased 3.7 percent in next 6 months; Russell 2000 slipped 0.8 percent; Nasdaq climbed 5.4%

Here are some other notable S&P 500 options statistics:

  • Call volume on the S&P 500 surged to a record high of more than 1 million contracts on Dec. 8, compared with less than 880,000 bearish puts
  • Short interest on the S&P 500 ETF sits at 3.1 percent of shares outstanding, 1.5 percentage points lower than the one-year average, IHS Markit data show
  • The ratio of outstanding bearish options relative to bullish ones on the fund was at 1.8 as of Friday, in line with its one-year average.