Short-term Outlook (1-5 Days):  10% Long (from 10/05 at 114.24)

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Equity Indicators - Updates and Extremes

Percentage of S&P 500 Stocks Above 50-Day Average and 200-Day Average

The indicator that seems to have generated the most attention since yesterday's big move is the now-overbought nature of the market.  That, at least, is defined by 90% (or so) of the component stocks of the S&P 500 being over their 50-day moving averages.

For testing purposes, I have this data back to 1996, so we only have 14 years of history, but at least it covers several different types of market regimes.

During that time, there have been 7 distinct times that the percentage of stocks above their 50-day moving average rose to the current level.  The table below shows how the S&P performed in the weeks and months following:

Any initial short-term spurts higher had a tendency to fall back modestly during the next week or two, but after that we saw the upside momentum return.  A month later, the S&P was higher 6 of the 7 times, with the one loss being miniscule.

During those one-month periods, the medium maximum loss was only -0.9%, while the medium maximum gain was +4.5%.  Only one instance lost more than -2% at its worst point, while all of them but one gained more than +3% at their best points.

What's unusual about this instance is that only 68% of stocks are above their 200-day moving average.  Usually, that's much higher by the time 90% of stocks are above their 50-day average.  The only instance from the table above where fewer than 70% of stocks were above their 200-day was April 2009. 

Economic Reaction Score

Over the past week or so, the market's reaction to economic news has been mixed.  On September 30th, we got a handful of positive reports, but the S&P 500 declined on the day.  Yesterday, the reports were net positive (for a growing economy) and the market took off to the upside.

Let's use this data to create an Economic Reaction Score.  We'll go back to 2000 and look at each day's economic reports, but only the ones that clearly reflect a growing or shrinking economy (things like unemployment, housing starts, GDP, etc.).

For each of those days, we'll tabulate whether the release was better or worse than economists' estimates heading into the report, and then compare that to whether the stock market rose or fell on the day.  If the reports beat estimates, but the S&P declined, then the Economic Reaction Score (ERS) was -1 for the day...because ostensibly it's a bad sign if the market declines on good news.

Conversely, the ERS gets a score of +1 if the economic news came out worse than estimated, but the S&P rallied that day.  As they say, a market that rallies on bad news is one that should keep right on rallying.

The chart below shows a rolling 10-day sum of the ERS.  Historically, it rarely got above +3 or below -3 over those 10-day windows.

The table below shows the S&P's performance going forward after the ERS hit +/- 3. 

The edge isn't mind-blowing, but it's pretty clear the market tended to do better after very positive scores than it did after very bad ones.  In fact, the S&P's median return was negative across all time frames up to three months later after very negative scores.

Currently, we're exactly neutral with a score of 0.  We've seen an offsetting number of days where the market rallied on bad news and fell on good news, so net/net there is no real positive or negative bias.  This will be something to watch as stocks break out to new multi-month highs.

This particular chart is not posted regularly to the site, but if there's enough interest from subscribers we will consider adding it, or some derivation of it.

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