About a month ago, the S&P 500 Index (SPX) closed at a record high of 6,978 and then…nothing. No breakout, no breakdown. If the SPX closes between 6,769 and 6,978 on Wednesday, it’ll be 20 straight trading days the index hasn’t made a new high, yet it has stayed within 3% of that peak.
I thought this sideways action near an all-time high would be interesting to explore. Is it a warning sign that buyers can’t push the price to overtake its high? Or is the fact that it sticks around so stubbornly just a pause before a continuation higher? In this article, I’m examining the historical data to see if there has been a tendency in either direction.
There have only been 19 other occurrences of the SPX going 20 days without closing above its recent high but remaining within 3%. The first table below summarizes the SPX returns after these instances. The second table shows typical returns since 1955 for comparison (that was the year of the first signal).
The one-week data is mixed. Over the next week, the average return was bullish after these instances, but the percentage of positive returns is about normal, and the median return is actually lower than usual.
The data shows market weakness over the next two weeks and month. One month after these setups, the SPX averaged a breakeven return with less than half of the returns positive. That’s weaker than the typical one-month return of 0.72% with 61% positive.
Over the longer term, three to six months out, the returns look more typical again. Average returns and the percentage of positive returns resemble historical norms, but do so with lower volatility.
Next, I wondered how long we can expect to be in this channel and whether it matters if you break out of the channel to the upside or downside.
Looking at the 19 prior instances where the SPX stayed within 3% of a recent high for at least 20 trading days, it stayed in that channel for 30 days on average. In other words, once it hit the 20-day mark, it typically chopped sideways for about two more weeks. The median was 25 days, or about one more week.
The first table below shows there were 12 instances when the SPX made a new high after the sideways action. I’m comparing that data to the second table which is for the other seven times when the index crossed the threshold of 3% below the high.
The data is mixed with the biggest difference coming at the one-month time horizon. Over the next month, the SPX averaged a 1.02% gain with 67% of the returns positive when it broke out of the channel by making a new high. When the channel break came by moving below the 3% threshold, the index lost 0.29% on average over the next month with 57% positive.
