The trading band of the S&P 500 Index notched its widest spread since 2020.

Friday’s market action saw the S&P 500 Index (SPX) reverse down into a column of Os on its default chart, falling from 5950 to 5800. This pullback is not a major move, especially when considering the extended run we have seen from the core US market benchmark over the past few weeks. This move also leads us back toward the middle of the current trading band, which is positioned at 5500 (based on Thursday’s market action). Considering the move objectively, this simply looks like normalization after a sharp rally.

Of course, nothing seems simple about the current market environment. Even the normalization doesn’t feel normal, given the warning lights of treasury yield uncertainty and credit downgrades (as we discussed in yesterday’s feature). The uncertainty surrounding market action over the past several weeks has led to significantly more chart movement than we would typically see.

One way to quantify this statement is by examining the spread between the top and bottom of the trading band for the default SPX chart. The trading band is derived from the weekly overbought/oversold calculation. Our Overbought/Oversold Whitepaper outlines the construction of these readings as follows:

To compute an OBOS value, we take ten weeks (50 days) of price data and use that information, along with a volatility calculation, to compute a “trading band” for the security. The location of the current price on this trading band is then expressed as a percentage. If the current price reaches the top of the trading band it is 100% overbought and if it reaches the bottom, it is 100% oversold

So, the Top corresponds with 100% overbought, while the Bottom corresponds with -100% (100% oversold). Readings can certainly go beyond these bands, but they are helpful guidelines for potential mean reversion in a given security/index, like SPX.

Examining the spread between the top and bottom of the trading band can help contextualize the current market action. A wider spread means more realized volatility, while a tighter spread means less chart action has occurred. The average spread between the top and bottom going back through 1950 sits at around 15%. Based on the market action last week, the spread between the top and bottom was double the average at around 32%. We saw an even higher spread between the two in the week ending on May 2, when the reading surpassed 34%. That was the highest spread we have seen since the pandemic in 2020. Other large spread can be seen from market shocks, with the highest reading coming during the hysteria in 2009.

Spreads like we saw this month are rare, but they are not unprecedented. It is important to note that they also do not persist for prolonged periods of time. Even in the most extreme cases, the spread will spike and then retract as volatility tapers off. There is certainly the potential for another spike down the road, but markets will at least take a breather in between the events. This suggests that the consolidation we have experienced over the last week could continue as we head into June, allowing the market some time to digest the heightened action that took place earlier this month.