About two years ago, the SPY ETF experienced oversold conditions for more than two days. Momentum has moved into high-risk territory.
On September 27, 2022, the 14-day RSI stayed below 30 for three days, marking the last oversold period for the SPY ETF.
In fact, the SPY ETF has only experienced oversold conditions once during this period, on October 23 and 27, 2023. Furthermore, prior to the last two V-bottoms in April and earlier this month, the ETF did not even become oversold, but the 14-day RSI stayed above 30.
It is possible that algos, institutional investors, and even professional traders are front-running these technical signals, but there is no proof. The fact is that momentum has been exceptionally strong lately and has moved into high-risk territory.
I developed the Momersion indicator 10 years ago to serve as a measure of the relative strength of momentum and mean reversion.
On August 5, 2019, the 252-day Momentum reached its maximum value of 57.54, and it also reached high values prior to the dot-com and GFC tops. The current value is 56.75. Note that the average value historically has been 46.48 because the stock market daily returns are mean-reverting.
A high value of Momersion is neither sufficient nor a necessary condition for a market top, and this is true for all indicators that are derivatives of price. However, from a risk management perspective, when a mean-reverting market moves into momentum territory, risks have increased significantly.
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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