Just How Overbought is the S&P 500?

Quite overbought, says MKM Partners’ Jonathan Krinsky:

AP

SPDR S&P 500 ETF (SPY) 14 Day RSI is now 75.5, or the highest reading since Sep. 2012. Closing at current levels would be the 85th highest reading for the SPY daily RSI dating back to 1995. Considering there have been ~5k trading days, that puts the current overbought reading in the top 1.7% of all occurrences over the last 20yrs. While overbought readings in strong uptrends can, and often do persist, we should also realize where we are in the short-term. If today closes positive, SPY would be up 14 of the last 17 days. 2 of the 3 down days were -0.05%, and -0.07% (essentially flat). The SPX is now 8.3% above its 200 DMA, which is within a few points of the largest spread in 2014. Of course this spread can get much wider (12% in May 2013), but we have to ask what is the risk/reward over the next few

What does that mean for stocks? Krinsky breaks it down:

If today closes with SPY RSI above 75, it would be the 100th such occurrence since 1995. Average returns 1, 2, 3, 5, and 10 days later are all negative, albeit not by much. Roughly 30% of those occurrences were in 1995. While some may compare the current market to 1995, in many ways it was a statistical outlier. If we take out 1995, the returns were slightly worse. Looking more recently, returns since 2009 drop off even further. Since 2009, there have been 17 days where daily RSI closed > 75. 15 of 17 times, SPY was lower five days later, by an average of -0.55%. The best return five days later was +0.55%, while the worst was -2.06

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If you’re a trader, this could be very important. But for anyone with even a slightly longer-term horizon, a 2.1% drop shouldn’t seem like the end of the world.