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In reading a number of strategists' take on the current market technicals, it seems many believe the market is oversold and due for a bounce.


As Tiho Brkan notes on his website, The Short Side of Long, "when it is obvious to the public, it is obviously wrong." As the below chart shows, the University of Michigan Sentiment indicator appears to indicate a pretty positive sentiment level.

(click to enlarge)
From The Blog of HORAN Capital Advisors

The American Association of Individual Investors sentiment release this past week saw a significant decline in investor bullish sentiment. The bullishness level fell 9.68 percentage points to 28.82%. The bull bear spread came in at -20 versus the prior week spread of -1.4. It should be noted this contrary indicator tends to be most accurate at extremes and it is not uncommon for a bottom market to turn when the bullishness level falls to the low 20s or even into the teens as one can see in the below chart.

(click to enlarge)
From The Blog of HORAN Capital Advisors

Certainly, the market can bounce in the short run. The below chart of the S&P 500 Index includes the percentage of stocks selling above their 50 day moving average and currently stands at 23%.

(click to enlarge)
From The Blog of HORAN Capital Advisors

I do believe the market could see a bounce short term; however, resistance will likely be reached at S&P 1,382, which is the 200 day moving average for the index. In Tiho's recent article, and well worth reading, he notes, "despite a decently strong sell off, Investor Intelligence proportion of bearish advisors has not risen meaningfully. From intra day high of 1474 towards intra day low of 1343, [the] S&P 500 has lost almost 10% and yet it is difficult to find a true bear out there. Various market participants continue to talk about bottoms and buying opportunities, neglecting deterioration in growth and earnings discussed above."

In this environment, investors should focus on high quality companies that have the ability to grow their earnings in spite of near term economic and political uncertainties. It is the political uncertainties in the U.S. and the euro zone that may be weighing most on the markets at this time. If Congress somehow agrees to a solution that avoids the fiscal cliff, that is more than kicking the can down the road again, the market would likely respond quite favorably.

Source: Many Believe Market Is Oversold: What Will Happen?