The S&P 500’s momentum is very overbought on a weekly and monthly basis. This is a medium and a long term bullish sign.
Here’s the weekly bar chart with RSI 14, which is making new highs.
Here’s the monthly bar chart with RSI 14, which is making new highs.
This is a long term bullish sign
Most historical bear markets began AFTER the S&P 500 and monthly RSI made a bearish divergence. Since the current bull market’s monthly RSI has not made a divergence yet, this bull market is not over.
The monthly RSI peaked in May 2007, while the S&P 500 peaked 5 months later in October 2007.
The monthly RSI peaked in January 1999. The S&P peaked more than 1 year later in March 2000.
Here the S&P and monthly RSI peaked at the same time. HBut keep in mind that this “bear market” was only suppose to initially be a “significant correction”. OPEC’s oil embargo in 1973 killed the U.S. economy, turning the “significant correction” into a bear market.
The monthly RSI peaked in January 1965. The S&P peaked almost 4 years later in December 1968.
This is a medium term bullish sign
Most significant corrections begin after the S&P 500 makes a divergence on the weekly chart. Since the current weekly RSI is making new highs, a significant correction is now highly unlikely.
Here are some charts plotting the S&P 500 vs RSI 14 (weekly).
Notice that there was no weekly RSI divergence before the 2010 significant correction began (see above chart).
Rationale behind this study
This study makes sense. The market does not die when momentum is insanely bullish. Too many people buy the dip, which prevents a small decline from turning into a big decline. Big declines happen after momentum has already weakened, which means that there aren’t enough investors/traders to “buy the dip”.
Other momentum studies come to the same conclusion. See What will the S&P 500 do after it rises 8 months in a row.
This study coincides with my Medium-Long Term Model, which does not foresee a significant correction or bear market in 2018. The model’s forecast changes as it is fed new up-to-date data.