Evidence the SPY is Overbought...

 A quick note on the recent market rally here of late.  It's plain to see the markets have been on a tear for the month of June (and going back into May for the QQQ) as the SPY closed today at its highest level in almost fourteen months.

If we start to look at the historical levels, however, it appears the SPY may be overbought in the short-run and susceptible to a mean-reverting pattern.

Here's the daily chart of the SPY as of today's (6/15/23) close...

When looking at the distance between the closing price and the 50-day moving average (illustrated by the yellow bar), we're noticing a large gap... this can be measured by a statistic I developed which I casually refer to as "variance"... or the distance between current prices and their respective moving averages.

Historically, throughout the life of the SPY (which debuted in January of '93), the variance over the 50-day moving average has peaked at a reading of 3.20... today's reading posts up at 2.49 as seen in this historical distribution chart below..

The reading is above the 97th percentile for this distribution.

A case can be made for regime-change bias here and I completely understand the argument, but I'll continue to use SPY population as a relevant subset over the S&P historical distribution which goes back almost a hundred years to 1926.

When prices have been at this type of elevated level, the subset of forward return data is significantly lower than the overall population of historical performance.  Historically speaking, the 7-day forward performance of the SPY has been just +8 basis points when the 50-day variance has been greater than it is today, versus the population mean for 7-day returns of roughly +22 basis points.

So while there's no evidence to suggest we'll see a massive increase in volatility and market selling, we do have reason to believe that the market may take a breather at this point.

From an options perspective, this expectation can be structured as a short risk-reversal play (selling OTM Calls and buying ITM puts), selling a call spread and using a portion of the proceeds to purchase puts, or simply purchasing puts outright as protection or as a speculative short position.