After remaining extended for nearly a month, the SPDR S&P 500 ETF (SPY) is in the process of unwinding overbought conditions.
Last week, the S&P 500 lost 3.6 percent, in the process losing both its 100- and 200-day moving averages. As well, shorter-term averages have rolled over.
Before the latest pullback began, between the September 29th low (186.93) and the November 2nd high (211.66), the S&P 500 ETF (SPY) rallied 13-plus percent. That is in a month – clearly an unsustainable pace!
Viewed from this perspective, the ongoing sell-off for stocks is normal – even healthy, as weak hands get shaken out.
That said, the stock market rally stopped at an important juncture. The November 2nd high was one of several times since May this year that the S&P 500 tried but failed at 211-212 (see chart 1 below).
S&P 500 ETF (SPY) Chart
Last week’s red candle followed six straight up weeks.
During the market rally, central-bank action/rhetoric – more easing (People’s Bank of China) and hints of more stimulus (European Central Bank) – helped. As did short-covering.
Short interest on SPY dropped 36 percent in the month and a half ended October 30th, and is at the lowest since the end of April (see chart 2 below).
S&P 500 ETF (SPY) Short Interest
Flows never cooperated.
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