S&P 500 is back in the Bollinger Bands

By Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc.
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The S&P 500 is finally back to within a relatively tight set of bollinger bands. You can see that it was trading above the bands on the way up, and below the bands on the way down, and occasionally traded in the bands when it looked to change direction (Oct 2021, April 2022, & August 2022). It has been largely trading within bands since October 2022.

Key settings:
20 periods (weeks)
1 standard deviation
Exponential moving average
Close prices

There have been some weeks recently in 2023 where the market traded above Bollinger Bands as it tried to break out of the bear market pattern. That did not last and we are now trading closer to the middle of the bands as the market corrects. Why the correction this time? Interest rates rising as inflation did not cool as quickly as expected by the Federal Reserve Bank and the Markets. So, the fear of rising interest rates, and the sense that monetary and fiscal conditions will tighten pulls money out of the market. 

In our words, we are calling this a RISK-OFF market because risk-free rates of return that you can lock in, risk free, right now, are rising to within 4% of the expected return that you hope to get by investing in risky assets. So, a bird in the hand is worth two in the bush, and 4.7% is worth at least 9.4% in expected returns...but our model is only calling 8.57%.  In this case, market participants may be incentivized to take the bird in the hand.  We are stretching this metaphor because I would usually want three birds in the bush in return for releasing the one in the hand, and that would require an expected market return of 3 x 4.70 = 14.1% expected return to risk, or a PE ratio of ~6.5x for a broad, diversified index.

So, what happens now? The market has been trading in Bollinger Bands since October 2022, and the recent attempted break out to the upside has been quickly brought back.

So, do we bounce off the bottom, test the top again, or move in a consolidation pattern for a few more days or weeks?

This is why we are risk-off. The market is not climbing, nor is it falling...it is choppy and moving sideways. If you need to be invested in stocks, look at increasing your diversification and pulling a few more chips off the table and putting them in safe, risk-free assets. Not all of them, but a few.

We believe that we need to see material economic news to drive a shift in stock prices. Keep your eyes on the news, and your own 'main street' economy.

Good luck in the markets. GLTA.
Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc.
​Chicago Quantum