My take on the S&P 500

The S&P 500 is trudging higher and has registered a new Weekly Overbought reading.

This Overbought moment is also occurring with some coincidence of it also trading at its highest percentage above the 200 Week Moving Average (WMA).

This is long-term stuff.

These levels were last seen in 2007 and 2001.

It seems logical for the S&P 500 to mean revert over the coming 2 years but keep in mind the mean will continue to roll higher, perhaps to 3,500 in mid-2022.

So, if the S&P 500 ‘rolls over’ and meanders from current levels back to the 200 WMA, it’ll result in a 20% decline and only mean we are back to the same levels seen in November 2020 (for context, that’s 8 months ago)

This is why I think index based/ETF type (overly diversified) investing will provide poor results over the coming 2 years and the ‘age of the stock picker’ is already upon us.

Although (and perhaps confusingly), if you reference this link, the broader market also has every reason to carry on higher, much like the late 1990’s and perhaps more so when coupled with today’s liquidity and with a risk-free rate (the 10 year bond yield) which is now averaging ~ 1.8% as opposed to the 5.5% in the late 1990’s…..all, until the 10 year minus 2 year yield spread moves above 2%.

July 5, 2021

by Rob Zdravevski

rob@karriasset.com.au