According to this article from Bespoke, S&P 500’s Most Overbought Close in More Than a Year, the S&P 500 is extremely overbought.
The only problem is that I can’t seem to replicate Bespoke’s study.
No matter how I try, I get the S&P trading at approximately 1 Standard Deviation above the mean of the distance from its 50 Day Moving Average. I have converted the distance above/below the 50DMA into percentage terms, but that should not make a difference.
My attempt at replicating Bespoke’s study is below.
Index Indicators also performs similar studies. Their chart is below.
My results aren’t exactly the same as Index Indicator’s results, but they are closer than Bespoke’s.
Does anyone out there understand exactly what Bespoke is measuring?
Based on my study and the graph from Index Indicators, the S&P 500 is overbought, but it is nowhere near the most overbought close in more than a year.
Update: Based on the work Chris posted (see link in comments) replicating Bespoke’s study, the S&P 500 was indeed the most overbought in a year. I just disagree that this presages a pullback.
Read a follow-up post here.
You, sir, are iBC’s mad scientist!
You cannot replicated it, because they are using a coloring book for technical analysis.
On a side note, do you still use Amibroker? Just noticed you have been using TradeStation graphs of late.
Happy Holidays.
lol @ coloring book.
No, I’m still using AmiBroker. I’ve made the charts look like tradestation because I like the way they look. Actually, I think I’m going to get rid of tradestation and go strictly with IB.
Yes, I get the exact same results as Bespoke on both Tradestation and StockCharts. Simply apply Bollinger Bands on $spx (50,2,-2), and you will get the same results.
Here:
http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=0&mn=7&dy=0&id=p99058429352
What is the period you use to determine StDev? Bespoke is using the last 50d, like Bollinger Bands. Is that the problem?
Bin, I have as default setting on my chart BBs with 50 day mean and 2, -2. I like that setting a lot for BBs. Still, it seems to me that Bespoke is measuring something different. Perhaps they are just expressing the relationship a different way in their graph.
I agree with Bin. I think it is just the 50 day Bollinger Band.
http://mysimplequant.blogspot.com/2010/12/spx-overbought-indicator.html
Well done Chris! I’d say you’ve nailed it.
Now, this is tangentially related…
A few years ago some research I did showed that when the SPY/SPX closes above 2 STDs from the 50 day average, that it was bullish. In fact, this signal would turn off any short signals. The results suggested that a close this far above the mean overrides any overbought signals. FWIW…
Chris, now run a study where you short the SPY when it closes 2STD above the 50 day mean. Use an N-bar exit to see what happens over the next few days to weeks…
I did it where you buy at this event. It is much more bullish than bearish. I don’t have a lot of hard conclusive evidence, but I’ve noticed that overbought indicators just don’t foretell lower prices very well. I think overbought can just become more and more overbought. But oversold is a different story. When certain oversold indicators hit ‘extreme’ levels, they tend to snap back better. I believe oversold is more reliable. Probably has to do with psychology. Anyways, thanks for the thought provoking post, as always.
I don’t have an opinion on overboughtness, but I definitely know that market internals are starting to diverge. This doesn’t mean that the market won’t go higher. It means that fewer stocks will participate on the upside.
I think Bespoke measures % from 50 dma as OS/OB indicator. So these are not the deviation bands but actual percentages that the horizontal lines represent.
Ruschem, that is exactly what I calculated, but as you can tell, my results were different from Bespoke’s. Chris’s results that he displays on his blog here: http://mysimplequant.blogspot.com/2010/12/spx-overbought-indicator.html are almost an exact match of what Bespoke published.
Good stuff all