S&P 500 has been overbought for a while, sparking concerns of an impending correction.
In the chart, the orange area represents the S&P’s distance (%) from the 200-day moving average. Currently, it stands 11.2% above the 200-day MA, exceeding the 7.5% threshold for one standard deviation (+1 SD green dotted line). Statistically, only 16% of the time does it exceed one standard deviation. The last instance, mid-last year, saw a peak and subsequent decline two months after surpassing one standard deviation—currently, it surpassed one standard deviation for two months again. Over the past 24 months, there were 4 months above one standard deviation, translating to 16.7% of the time.
From a pattern perspective, the current S&P formation mirrors that of mid-last year, which experienced a noticeable 10% correction after three peaks.
While history may not repeat precisely, chasing highs at this stage might not be advisable.
