I noted this week on CNBC that the major indexes were not only at new highs, but that they were a bit "stretched."
By that I meant that the main U.S. indexes are far above their 50-day moving averages. Typically, when these indexes get too far from that average, there is a reversion to the mean, and the index corrects, or at the very least, stops rising.
I want to quantify that for you, using data from our partners at Kensho.
Right now, we are 1.7 standard deviations away from the 50-day moving average on the S&P 500. Standard deviation tells you how far away you are from a mean in a collection of data. The "mean" is the midpoint of any data set: Half the data is above that point, and half below.
Source: CNBC, FactSet
One standard deviation from the mean in either direction accounts for about 68 percent of the data in any set. Two standard deviations is fairly rare, as it accounts for roughly 95 percent of the data.
So a standard deviation of 1.7 is a fairly unusual event: It only happens on less than 9 percent of all trading days.
See? Mean reversion. Mind you, that doesn't mean some sudden drop is about to happen. It just means the markets are typically lower after this occurrence.
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This may already be happening: The S&P has stalled in the last couple trading sessions. Over a week or so, even sideways or a modest decline of a few points will bring the price closer to the 50-day moving average.
Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.
