Good morning, everyone, Friday the 14 June 2024.
Updating the previous post on the current market environment.
The premise of the research is that every time the S&P 500 as depicted by SPY (ETF) reaches a price extension of 2 standard deviations we are at overbought levels and usually observes a pause or slight pull back in price.
A reminder that this is a statistical approach to analyzing the market environment. It's not based in any fundamentals or technical analysis. There is a lot to be said for both fundamentals (macro and micro) and also technicals (divergences, narrow breath etc.) but this is not the place.
Quick recap:
We ended the previous update on the 28th of March this year when I stated that it might be a good time to reevaluate allocations.
We did experience a small pull back (5.47%) after that date but not nearly as severe as I expected. I was thinking more in terms of the average pull back in long term uptrends which is normally around 10-12%. Anyway, let take it from there.
Remember that we are looking for the average price in a trend from one swing to the next, be it a swing high or a swing low.
Here is the price action as depicted by the bell curve from 29 March up to the close yesterday which was the 13th of June.
Average price: $519.38
1 sigma: $531.28
2 sigma: $543.20
This is the price action for the same time period in a line chart form:
We see the 5% pull back from the end of March to the 19th of April when the market bottomed out (Swing Low). Incidentally, the price on the 19th of April again turned right at the 2 standard deviation level. (It's kind of crazy) It's almost like price knows when it reaches that level.
I have racked my brain, but I'm don't know how to figure it out. My hunch is that there is a minimum amount of data that's needed to give the trend some "weight" which then leads to price starting to "pay attention" to statistical phenomena. (Anyway, thinking out load on a screen....)
The next important take away from this is that we are finding ourselves very close to the next 2 standard deviation price extension level. That level is currently $543.20.
As before, I'm not saying that the market is going to crash from here, but I will not be surprised to see a pause or a slight pull back.
Like you, I find myself in the front row with caramel salted popcorn!
Take care, talk soon
Hendrik
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