AI Frenzy Pushes S&P 500's RSI To Most Overbought Level Since November 2021: What Does History Suggest Will Happen Next?

The pace at which stocks have surged in recent weeks has begun to trigger a few warning signals among the most common technical tools used by traders.

On Friday, June 16th, the relative strength index (RSI) for the S&P 500 Index reached its most overbought level since November 2021, suggesting that the market may be overextended and poised for a correction or reversal.

The S&P 500’s daily RSI surged to 76, considerably over the overbought level of 70, reaching its highest level since November 2021.

The index of the 500 most-capitalized U.S stocks, closely tracked by the SPDR S&P 500 ETF Trust SPY has surged 6% so far in June, and might be on track to post its seventh straight session of gains on Friday.

How Did The S&P 500 Perform In The Past When Overbought RSI Conditions Were Triggered?

Overbought RSI conditions in mid-August 2022 almost perfectly signaled a subsequent stock market drop. The S&P 500’s RSI indicator hit 73 on August 16, 2022, on the same day the index topped at 4,324 before plummeting 19% by October 13, 2022.

The elevated overbought conditions (77) in November 2021 experienced a slight relief due to a minor downturn as we transitioned into early December. The S&P 500 index subsequently reaccelerated to new highs on January 4, 2022, but the RSI exhibited no overbought conditions, establishing the so-called bearish RSI reversal, indicating that the bull strength had run out of steam. The S&P 500 then fell 14% by mid-March 2022.

Chart: S&P 500 Reactions To Prior Overbought RSI Conditions