S&P 500: RSI

by George Hatjoullis

S&P 500

The S&P 500 has been resilient and managed around a 5% move higher so far this year to date. Not spectacular but not too shabby. If it can match this again in the second half of the year no one is going to complain, except the bears. January started badly with headlines of ‘worst start since 1933’. As I pointed out at the time (S&P 500: ‘worst start since 1933′), in 1933 the S&P 500 went on to scale new heights. Geopolitics suggested a risk of a correction in March but this proved barely noticeable and short-lived. The index has continued to grind ever so gently higher despite widespread scepticism and concern about valuations.

The key has been liquidity. Despite the ‘taper’, liquidity provision from the Federal Reserve remains plentiful. Interest rates are low and seem set to remain low for rather longer than anyone really expected. Bond yields have come lower across the curve. The economy continues to improve at a steady if unspectacular pace. The anchored markets seem to be dragging the economy towards them making valuations look less extended. One suspects this is what the Federal Reserve had in mind. It is conceivable that the S&P 500 continues to grind higher by another 5% until year-end. It is also conceivable that the path is a little more indirect.

One should not forget January when the index fell by around 7%. A quick look at the chart above reveals that the RSI had moved into overbought territory and had begun trending lower prior to this drop. The RSI is once again in overbought territory. It is also summer, when markets get a little thin, and extreme, albeit short-lived, moves are not uncommon. If the RSI starts trending lower than this may signal a correction. It is worth keeping an eye on the RSI