New Signs The Market Will Likely Remain Oversold At Least One More Week

 |  Includes: AAPL, BIDU, CAT, GE, JPM, SPY
by: The Independent Investor

Wow, the market is going straight down. While most stocks and sectors did not rally hard from the summer of last year through mid-April, the market has sold-off hard over the last several weeks.

Still, while the S&P 500 and its tracking exchange traded fund, SPY, are up over 20% from the summer of last year, stocks such as Apple are up over 20% this year alone.

While market indexes such as the S&P 500 and Shanghai composite have sold-off in a fairly orderly fashion, leading stocks such as Baidu (NASDAQ:BIDU) and Apple (NASDAQ:AAPL) have declined by more than 15% since peaking in the middle of last month.

Recent economic data points have been discouraging as well.

While the market was aware of the weak recent jobs data in the U.S., as well as the poor economic data from Europe, the recent economic data from Asia has been disappointing as well.

China's recent trade report was below most analysts' expectations and the recent GDP report from Japan showed much of the country's first quarter growth was attributed to one-time expenditures related to infrastructure rebuilding after the earthquake. Japan's forward looking economic data points, such as capital expenditure and new orders, showed a slowdown as well.

The recent poor economic data from Asia suggests the disappointing jobs data in the U.S., and poor overall economic data in Europe, could show a more pronounced slowdown than expected.

Also, while the decline in the S&P 500 and other broader indexes has been fairly orderly, the recent breakdown in market leaders, such as Apple, is notable as well.

The breakdown in Apple suggests that the market may need new leadership to go higher. While the fundamentals at Apple remain strong, the company is not expected launch its new iPhone 5 until August, and summer has historically been a weak period for tech stocks.

Baidu also sold-off hard over the last month after the company disappointed with its first quarter earnings report. Baidu's quarterly earnings were strong, but the company's revenue growth was slower year-over-year, and Baidu continues to have trouble increasing its market share in the high profitable mobile space as well.

Baidu also lacks a near-term catalyst, which as I've discussed at length in my recent article, will likely fail since the a mobile space in China dominated by a couple companies that specialize in very specific online services and product offerings. Even if Baidu's new smartphone is able to increase the company's market share in the mobile space, we likely won't know if this new product launch is successful for several quarters.

While tech and the financials have been the strongest leaders during the market's recently rally, and longs in the financials seemed to capitulate last week on the news of JP Morgan's (NYSE:JPM) massive trading loss, the recent sell-off in Apple and Baidu on low volume suggests these stocks may have further downside.

Finally, while the market has declined for several straight weeks, and many companies with strong balance sheets and yields over 3% are trading at around 10x an average estimate of next year earnings, the market is still likely only moderately oversold.

The S&P 500 has held up fairly well as an index, compared to the performance of many stocks in leading sectors, such as the financials and big cap tech, companies such as Apple are still up significantly on the year, and some of the largest index weighted companies, such as GE, are barely 5% off these company's highs for the year.

The VIX, at around the 24 level Thursday, is also only moderately above the 21-22 area where this fear indicator spiked to last month's when fear levels were rising over the sudden rise in Spanish debt rates, sitting at around 24, signaling fear levels have only risen moderately despite the recent worsening macro data.

While I've viewed the VIX's low levels as a strong sign in the past that the market was willing to look past possibly short-term issues, such as the recent poor jobs data and spike in Spanish yields, the VIX's failure to move up significantly while the macro data has continued to deteriorate suggests investors are likely still fairly complacent.

To conclude, while I maintain that for long-term investors that many companies are likely oversold and undervalued, with companies such as GE and Caterpillar (NYSE:CAT) yielding over 3% and trading at less than 10x an average estimate of next years earnings, the market has no strong catalyst in the near-term with earnings season over and macro data disappointing.

As Warren Buffett has talked about, the market has a voting system short-term, and a weighing system longer-term, valuation alone will not likely be enough to reverse the market's downtrend in the near-term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.