Schaeffer's Top Stock Picks for '25

Timing When the S&P 500 Could Lose Steam

Analyzing the monthly RSI's of the S&P 500 and Nasdaq Composite

Senior Quantitative Analyst
Jul 29, 2020 at 8:09 AM
facebook X logo linkedin


The Nasdaq Composite (IXIC) is on pace to end the month in overbought territory, according to its monthly Relative Strength Index (RSI) reading. The RSI is a popular technical analysis indicator available on practically all charting software. It is an oscillator that ranges from zero to 100; a reading of 70 or above is often considered overbought, while a reading of 30 or below is often considered oversold. Recently, I did a study on how the Nasdaq, as well as the S&P 500 Index (SPX), has performed in the past following a cross into overbought territory based on the monthly RSI.

Nasdaq & RSI Chart

Nasdaq Now Overbought

We have data on the Nasdaq going back to 1971, and in that time there have been 18 occurrences of the index's monthly RSI crossing above 70. I only considered instances when it was below the level for at least the prior three months. The table below summarizes the Nasdaq returns after these occurrences, while the second table shows typical returns since 1978 -- the year of the first signal. Based on this, the Nasdaq has typically performed well over the next month, with an average return of more than double the typical return; and 67% of the returns positive versus the usual 61%. After that, however, the index has stalled. The three-months after a signal has underperformed its usual return, while the six and 12-month returns aren’t much different from normal.

          Nasdaq After RSI Crosses        

S&P 500 Not Overbought Yet

The SPX hasn’t run up with the same veracity of the Nasdaq, so its RSI isn’t as high as the Nasdaq. It’s right around 60, but climbing. I gathered the data going back to 1950 on when the monthly RSI on the S&P 500 crosses above 70.

For the S&P 500, the RSI looks to give a more reliable overbought signal. The index underperforms going forward at each time frame I looked at. As you can see in the table below, a year after a signal, the SPX averaged a gain of about 5% with 54% of the 26 returns positive. Typically, the average 12-month return for the index was 8.8%, with 74% of the returns positive. The one, three and six-month returns after a signal all have a lower average return than the typical return, with a lower percentage of positive returns as well. When the monthly RSI gets to the overbought level on the S&P 500 Index, it might be time to expect less from stocks. That’s still at least a month away and probably more.

SPX After RSI Crosses

 
 

You have the chance to join one of Bernie's most exclusive programs, complete access at HUGE savings!

As we prepare for a new administration to take the reins in Washington, the near-term market landscape is rife with uncertainty.

The Federal Reserve has already hinted at the turbulence ahead, lowering its interest rate outlook for 2025.

Meanwhile, breakthroughs in artificial intelligence (AI), quantum computing, and other transformative sectors have unlocked incredible profit potential.

But these opportunities are fleeting, and timing is everything. That's where Quick-Hit Trader comes in.

Quick-Hit Trader is designed for precision and speed, getting you in and out of the market in a flash. While other investors scramble to navigate volatile conditions, you'll have access to expertly curated trades that leverage these rapid shifts to deliver explosive profits in short order.

This is your chance to capitalize on the fast-moving market like never before. Are you ready to make your move?