Oversold Market Reaching Extremes

The graphic below is from our Daily Morning Lineup, and it shows the current levels as well as the one week change in the trading ranges of the S&P 500 and its ten sectors. The circles represent where the sectors and index currently stand, while the tail represents where it was one week ago. When the circle is in the red zone, the sector or index is overbought (light red=overbought, dark red-extreme overbought). Readings in the green zone indicate that the index or sector is oversold (light green=oversold, dark green = extreme oversold). For this analysis, overbought and oversold measures are defined as one standard deviation above or below the index's 50-day moving average.

Following the recent declines, the S&P 500 has now moved into oversold territory for the first time since March 11th. On a sector basis, only two (Health Care and Consumer Staples) are currently above their 50-DMAs, while eight are below. Of the eight trading below their 50-days, six are currently oversold, and four of those (Cons. Discretionary, Energy, Industrials, and Materials) have reached "extreme" oversold levels (two standard deviations below 50-DMA). Like the overall market, it has been awhile since this many sectors were "extremely" oversold. You have to go all the way back to the March 9th low to find a day when more sectors were oversold. If you're bearish, this is the break you've been looking for, while if you've been waiting for a correction to get in, now is your chance.

click to enlarge

Comments

[Macro_Man:]

One has to be careful of using oscillators when a new trend starts or gathers momentum. It looks like the correction is gathering momentum and the oscillators will show oversold readings and we will remain oversold for a while. Using this to bet against a correction simply means one is going to lose money. This is not a time to buy using signals from oscillators.

Jul 08 11:04 AM

[asaf123:]

Oversold? Really? At a P/E of 15x 2009 earnings, I would say the market is still highly overbought. Unless you think 2009 corporate earnings are going to magically come in at $80 or so...

Jul 08 11:05 AM

[Prudent Man...:]

If and when the economy stabilizes what is going to be the catalyst to change our stagnate economy? I hope it is out there, but don't see it, as without one and with increased government regulations, taxes, controls, debt, etc. this country will not be able to meet it debt service, something we did not have to be concerned with during the Great Depression.

If we do not see "real" growth our standard of living will decrease. How the entitlement generation adjusts to that will create grave social unrest.

Jul 08 12:07 PM

[jeandit75:]

let's relook at these indicator when s&p hits the number of the beast (666)! he he

Jul 08 02:20 PM